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A Question About How Stablecoin –> Non-Stablecoin (or vice versa) Farms Work

I sort of understand the basics of LP and impermanent (divergent) loss. What I’m confused by, and maybe I need an ELI5 explanation, is when it comes to a Liquidity Pair where one is a regular coin like ETH and one is stable like USDC.

If I stake equal parts ETH and USDC, wouldn’t the ETH always diverge from the stablecoin since ETH will fluctuate but USDC should always = $1.00 (in theory).

My basic understanding is for LP farms, you want as little fluctuation as possible, and if there is fluctuation, there is less imperm. loss if the prices fluctuate *together*, both go up, both go down. Is this correct?

I’m assuming USDC > DAI (for example) would be the lowest risk, lowest yield LP farms since the price should in theory always remain the same. But just confused how non-stable > stable LP farms work.

What do you think?

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5 Comments

  1. As long as the fees/incentives you get cover the IL you are good. Look up an IL calculator, it’s not that bad, if the non stable asset goes up by 100% you lose around 5.7% to IL.
    And yes, ideally you would like to provide liquidity to a pool of 2 assets that are correlated and are both going up at a similar pace/staying stable.
    Understanding IL is important but imo there is too much emphasis put on it. The point is to pick a pool with good apy with assets that you expect to go up in price.

  2. When folks use your pool to trade they leave an equal value of the one token for the other, plus a fee. In your case you’d get more USDC if someone traded in for ETH. IL will occur but not nearly enough for more folks to care until you start to see prices go up by the factor of 5x or so.

  3. Many people confuse Impermanent Loss with “a coin just losing value”. As someone else noted, if in your example ETH doubles in a year (yes very possible), your IL is only 5.7%! I can out earn that a few times over with a number of different pools.

    If ETH triples, your IL is 13%. Bummer, but again I am out-earning that in APY twice over in a year. Yes taking huge risk that the APYs actually hold for a year (very bad assumption).

    All that being said, I also believe ETH and BTC will trade sideways for a long time, which is why I am fine in a number of Stable/ETC and Stable/WBTC farms right now.

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