There is a widely popular article about the Impermanent Loss by Bancor that is usually shared on Telegram when someone asks why his tokens are disappearing after they pooled it on Uniswap. The top claim of Bancor’s article is that “users who provide liquidity to AMMs can see their staked tokens lose value compared to simply holding the tokens on their own.” This is one of the most repeated claims in DeFi. But it is also inaccurate.
Or at least it is not exactly true in the context of providing liquidity to the UniswapV2 pools. Let me explain with two pools similar to the ones in the Bancor’s article: LINK/ETH and USDC/ETH.
Pooling LINK/ETH for 8 months
Let’s say you pooled 1,070.77 LINK and 19.75 ETH into UniswapV2 on 18 May, 2020. LINK was around $3.78 and ETH was $214.73. You received about 145.43 UniswapV2 LP tokens representing a total value of $8,482.94.
As of 7 Jan 2021 these LP tokens equal to about 1,590.04 LINK and 21.80 ETH, and a total value of $52,242.37. That’s a 515% increase of your stack.
If you were simply hodling your initial 1,070.77 LINK and 19.75 ETH, the total value of your stake would be $41,249.67 representing a 386% increase of your stack.
Pooling LINK/ETH would increase the value of your stack much more than simply hodling.
Pooling USDC/ETH for 1 month
Let’s say you pooled 20,000 USDC and 33 ETH at the beginning of December when ETH was about $600. You would receive about 0.00064 UniswapV2 LP tokens representing a total value of almost $40,000.
As of 7 Jan 2021 these LP tokens would be worth about $59,000. If you were simply hodling the USDC and ETH in your wallet, they would be worth about $60,000.
In this case, you would be slightly better off hodling, but even when pooling your stack increased by 50%. Where’s the loss? Well, if you look into the composition of your pool share, you will see you now have 30,000 USDC and 25 ETH. The pool “sold” for you 8 ETH at an average price of 1,250 USDC. That’s higher than ETH all time high as of writing, because your sell price is subsidised by the fees collected from the pool’s transaction volume.
If ETH price continues to climb, your ETH amount will go further down, while USDC will rise. However, when the market crashes, the pool will keep rebalancing your stack the other way around, increasing your ETH and decreasing your USDC. And that’s a good thing.
The sustainability of UniswapV2 pools is very correlated to their daily volume. If you are risk-averse, you should pick pools of tokens paired with stablecoins that have both high liquidity and high daily volume. If you want ot maximise your gains, you should pick pools that have low liquidity but high daily volume. If you are super safe, you could pool into DAI-USDC, DAI-USDT or USDC-USDT.
During market crashes, if you hold LPs of the token of interest paired with a stablecoin, the price decrease of that token means your stack value drops, but the amount of that token in your stack increases, offsetting some of your losses (unlike hodling, where if you simply hodl, you really get rekt, and not by the impermanent loss :P).
If you hold LPs of the token of interest paired with ETH, you are exposed on many more fronts. If ETH price increases, your stack will have less ETH but more of the token. However, when the market crashes, and usually BTC, ETH and alts crash together, the value of your stack will decrease fast, as both ETH and the token price decreases.
Additionally, the point of entry into the pool is crucial. The best situation for a pool participant is when the price oscillates within some narrow bands, or has a constant uptrend since entering the pool. Your gains over time from price increase and fees will cover the reduction of the amount of the token, or price decreases.
However, entering a pool during the token’s all time high (ATH) may result in a decrease of the value of your stack in case of a price fall or market crash. That said, if your pool pairs the token with a stablecoin, the overall stack decrease will be lower than if you would simply held the token in your wallet.
Trendering discounted access for liquidity providers
Pooling is good for you, especially on stablecoin pairs. And liquidity is king. That is why I will offer discounted access to the Trendering Dapp and Private Telegram group for the liquidity providers of DAI/TRND and ETH/TRND UniswapV2 pools.
You already have to hold 170 TRND to access the Trendering Private Telegram group. The next Trendering Dapp update will bring new features to the Pool Monitoring, and you will need to hold 130 TRND to use the Dapp.
However, liquidity providers will have to hold either 170 DAI/TRND or 3.44 ETH/TRND UniswapV2 LP tokens to access both the Dapp and the Private group. That roughly translates to providing 64 TRND + equivalent DAI or ETH into the UniswapV2 pools.
PS. Here is a nice tool to check the current structure and value of any Uniswap or Sushiswap LP.