Introduction: Ethereum is a layer 1 blockchain that pioneered smart contracts, while Polygon is a layer 2 solution built on top of Ethereum that is faster with lower fees. Sushiswap has a suite of decentralized financial products, most famously they’re an automatic market maker (AMM) offering a place for users to swap between various token all while maintaining the private keys to these assets (vs. centralized exchanges who hold the users keys/assets). Sushiswap users can deposit their assets in pools, which are used for token swapping, and will receive a cut of the transaction fees as incentive to do so. However, a risk of depositing into pools is “impermanent” loss, which is the amount lost while money is deposited into a pool vs. if user would have just bought and held their assets. The purpose of this analysis is to compare the impermanent loss in Sushiswap’s WETH/USDC pool on Ethereum vs. Polygon.

Methodology:

• Identified the liquidity deposits on both chains using the ethereum.core.ez_token_transfers and flipside_prod_db.polygon.udm_events , respectively.
  • USDC/WETH Sushiswap pool_address on Ethereum: 0x397ff1542f962076d0bfe58ea045ffa2d347aca0
  • USDC/WETH Sushiswap pool_address on Polygon: 0x34965ba0ac2451a34a0471f04cca3f990b8dea27
  • Included Ethereum deposits between Block # 14000000 - 15180000 and Polygon deposits between 1/13/22 and 7/21/22.
• Calculated impermeant loss by using the amount of WETH/USDC deposited, the price of WETH at time of deposit and on 7/21/22, ignoring any liquidity withdrawals.
• Used these links to understand impermeant loss calculations: and .

Impermanent loss on Polygon consistently higher for depositors between Jan and mid-Jun, but now higher for Ethereum depositors.

As product of the impermanent loss formula, it goes up and down with WETH price.

Conclusion:

• During periods of sharp changes in WETH price, it’s best for depositors to (1) wait until the WETH price is around the same as when they entered when they withdraw to avoid impermanent loss, and (2) ensure that LP rewards are greater than impermanent loss to make LP investments profitable.
• Impermanent loss on Polygon has been typically higher than on Ethereum.
• Maximum impermanent loss during this period was ~7% if deposited at peak WETH price in April.
• January had the most LP deposits and they are multiple times more depositors on Polygon vs. Ethereum.

Detailed view of impermanent loss calculations for each depositor on Ethereum

Detailed view of impermanent loss calculations for each depositor on Polygon

Multiple times more depositors on Polygon vs. Ethereum. Interestingly low periods of deposits in April and May when Ethereum was peaking.

Extremely large spikes in $USD deposits on both Ethereum and Polygon in February. Luckily, most deposits only experienced ~3% loss vs. if they would’ve invested a few weeks earlier when it was 5-6%.