Distinguishing Between Price Exposure and Impermanent Loss in Asymmetrical LP’ing
2022-03-08 — 3 min read
In LP University, a series of questions we sometimes see is, “If I entered a Liquidity Pool (LP) asymmetrically with X number of RUNE (or any other asset), why is my current redeemable value less than my deposit amount? Is this Impermanent Loss (IL)?
These questions understandably mistake Impermanent Loss for what is called Price Exposure.
An asymmetrical deposit into a liquidity pool is nothing more than a swap-and-enter without the depositor manually making the swap. You will then have price exposure to both assets in the pool. If the other asset price drops, you will NOT get back your original deposit amount. This is purely price exposure and has nothing to do with IL.
For example, let’s say you made an asymmetrical deposit of 1000 RUNE (at $10 Rune) into the RUNE/BTC pool, while BTC was priced at $50,000. Upon entry, the system automatically sells 500 RUNE to buy 0.1 BTC (both then at $5000 value). You now hold 500 RUNE and 0.1 BTC (discounting slip).
What if, during your pooling time, the RUNE price remained constant, while BTC price dropped to $30,000? Even before considering IL, your 0.1 BTC holding is now worth $3000. If you choose to withdraw from LP at this time, your 0.1 BTC will be converted to 300 RUNE, thus your total withdrawal value would be 800 RUNE (discounting slip); in other words, NOT the original 1000 RUNE deposit.
Let’s look at another example. This time, you are also making an asymmetrical deposit of 1000 RUNE (at $10 per Rune), but into the USDC stablecoin pool. Upon entry, the system automatically sells 500 RUNE to buy 5000 USDC (both then at $5000 value). You now hold 500 RUNE and 5000 USDC (discounting slip).
USDC will of course stay at a constant price of $1, but let’s assume RUNE price increased from $10 to $15. Without considering IL, your 500 RUNE holding is now worth $7500, but your 5000 USDC is still worth $5000. If you choose to withdraw from LP at this time, your 5000 USDC will be converted to 333.3 RUNE at $15 per RUNE, thus your total withdrawal value would be 833.3 RUNE (discounting slip); in other words, NOT the original 1000 RUNE deposit.
Again, this has nothing to do with IL — simply price exposure. In reality, we would still need to factor in IL and also pool earnings to calculate an accurate return. You can learn about this last part of the process here.
Feel free to hop into the TC University Discord to chat about this, or any other THORChain questions that you may have.
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