I'm trying to make sense of these LP's and understand how impermanent losses can affect my portfolio... If you're like me, read this research I've done today:
If you’re diving into the world of liquidity pools on platforms like Uniswap, it’s important to understand the risks and rewards—especially when you hear about things like impermanent loss. In this post, we’ll walk through the USDC/SURGE liquidity pool, factoring in an average 45% APR along with a 15% weekly yield for holding SURGE (calculated annually). Let’s see if the rewards truly outweigh the risks.
What Is Impermanent Loss?
Before we get into the juicy details, let’s quickly recap impermanent loss. This occurs when the price ratio between the assets in your liquidity pool changes. For example, if SURGE rises in price compared to USDC, the pool will adjust to hold more USDC and fewer SURGE. The impermanent loss only becomes permanent if you withdraw your assets while the price imbalance exists. If the prices return to their original state, the loss can reverse.
The Setup: Adding Liquidity to the Pool
Let’s assume you’re providing liquidity to the USDC/SURGE pool on Uniswap. Here’s the initial setup:
- $1,000 worth of USDC
- $1,000 worth of SURGE, priced at $0.75 each (meaning you have 1,333.33 SURGE)
Your total deposit is worth $2,000:
- $1,000 USDC = $1,000
- $1,000 worth of SURGE = 1,333.33 SURGE (because 1 SURGE = $0.75)
So, the total value of your deposit is $2,000. Now, let’s see what happens if the price of SURGE goes up.
Price Change: SURGE Rises to $1.00
Let’s say the price of SURGE increases to $1.00 (a 33.33% increase). The liquidity pool will need to adjust to maintain balance, so you’ll end up with:
- 1,500 USDC
- 667.0 SURGE
This happens because the pool needs to hold more USDC to match the increased price of SURGE.
What Happens When You Withdraw?
Now, after the price change, you decide to withdraw your liquidity:
- You’ll receive 1,500 USDC and 667.0 SURGE.
- 1,500 USDC = $1,500
- 667 SURGE = $667 (since 1 SURGE = $1.00 now)
So, the total value of your withdrawn assets is:
1,500 USDC+667 USD worth of SURGE=2,167 USD
But What if You Had Just Held the Assets?
Let’s compare this with simply holding your $1,000 worth of USDC and $1,000 worth of SURGE outside the pool. Here’s what you’d have:
- $1,000 worth of USDC = $1,000
- $1,333.33 SURGE at $1.00 each = $1,333.33
So, the total value if you had just held your assets outside the pool would be:
1,000 USD+1,333.33 USD=2,333.33 USD
How Big Is the Impermanent Loss?
Now, let's calculate the impermanent loss:
- Holding the assets gives you $2,333.33.
- Withdrawing from the pool gives you $2,167.
That’s an impermanent loss of $166.33 (or 7.13%).
Adding in the 45% APR and 15% Weekly Yield
Now let’s add in the 45% APR and the 15% annual yield on SURGE, calculated properly.
45% APR:
If the liquidity pool offers an average 45% APR, which means for every $1,000 you’ve invested, you’re earning $450 in rewards annually. For your $2,000 deposit, this translates to:
2,000×0.45=900 USD per year
15% Annual Yield on SURGE (Paid Weekly):
The 15% annual yield on SURGE is paid weekly. Since 15% is annualized, the weekly yield is:
15%/52≈0.288%
So each week, you’ll earn 0.288% of your $1,000 worth of SURGE. That means you’ll earn:
1,000×0.00288=2.88 USD per week
If you hold for 52 weeks, the total annual yield would be:
2.88×52=149.76 USD in one year
I know I talk about an average of 45% APR.... but that's because I want to look at deflated numbers. Look at that number today, 182%APR!!!!
Total Earnings (APR + Weekly Yield)
Let’s put everything together to calculate your total earnings for 1 year:
- $900 from the 45% APR on USDC/SURGE
- $149.76 from the 15% annual yield on SURGE
Total earnings in 1 year would be:
900+149.76=1,049.76 USD in total rewards
Now, even though you experienced $166.33 in impermanent loss, your total earnings for the year would more than make up for it, leaving you with a net gain of $883.43.
Is It Worthwhile?
Even though impermanent loss is a factor, the combination of 45% APR and the 15% annual yield on SURGE (paid weekly) can still provide a solid return. After one year, your net profit would be $883.43, more than making up for any losses and generating good profits.
If you plan to hold for a longer period, these rewards can compound and make liquidity farming incredibly rewarding.
Conclusion
Providing liquidity to a pool like USDC/SURGE with a 45% APR and 15% annual yield on SURGE (paid weekly) can be a great way to earn passive income. While impermanent loss is a factor, the rewards from both the APR and the weekly yield can more than offset any potential losses.
Interested in checking out the pool? Here’s the link: USDC/SURGE Pool
Do your research, understand the risks, and only provide liquidity with assets you’re comfortable locking up. Happy farming!
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