How Liquidity Pool Works for Unstable Pair Part II

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You are not bored. You are boring.

3 years ago

Topics: Liquidity Pool, SmartBCH, Farm, Staking, Earn, ...

Heya! This article is the continuation of my previous article. If you haven't read any of it, don't you worry because I have attached the link here and if you are interested to read it, you just have to click the link and you will automatically redirected to it.

On how liquidity pool works on both Unstable pair part I, I have discussed about the two cases,

CASE I

If token A and token B increased at the same time with the same percentage of increase, the quantity on the pool remain as is and the value of your initial capital in $ increased.

CASE II

If token A increased in price more than token B, the quantity of token A in the pool becomes lesser and the quantity of token B increases. Vice versa. And at the same time your initial capital in $ also increased

Today I will discussed about the other three cases. Let us use the same capital and the same example on my previous article.

Let us say, you have an initial capital of 100$ you want to farm eben and you have seen that the most profitable pool farm is spice-bch because it has a high apr.

Again let us allocate your fund as before,

Case III In this case we have to find out what would happen if your pooled pair decrease in price at the same time with the same percentage of decrease.

For example, let us say both spice and bch went down for 30%.

`Current price = Initial price- (Initial Price x 30%)`

`Simplifying,`
`SPICE=0.00064 (1-.30) = 0.00048$/spice BCH=670(1-.30)= 469$/bch`

Now multiplying the Initial token that you pooled to the current decreased price.

`SPICE=78125 × 0.00048 =35$ BCH=0.074626866 × 468 = 35$`

As you can see the price is still balance. And since it is balance, nothing will change inside your pool. Once you removed your liquidity you will be able to get the same quantity of your pooled token or coin pair, but your initial capital becomes 70$ which is what we called impermanent loss. From your capital of 100$ you lost the 30$.

(Well my take on this is, if you are a holder of both tokens at least you've gained something from farming :P)

In conclusion, if the price of both token A and B dropped at the same rate of percentage, the quantity token inside remain as is but your initial capital is at loss.

Case IV. In this case we will discussed what will happened if both token dropped but they dropped in different rate of percentage.

Assuming the current market of spice dropped to 30% and bch dropped to 40%.

`Current price = Initial price- (Initial Price x rate of dropped%)`

`Simplifying,`
`SPICE=0.00064 (1-.30) = 0.00048$/spice BCH=670(1-.40)= 402$/bch`

Now multiplying the Initial token that you pooled to the current decreased price.

`SPICE=78125 × 0.00048 =35$ BCH=0.074626866 × 402 = 30$`

Since the current price is not balance we have to balance the $ value and divide it equally to each of the pair.

The figure above shows that to balance each pair must have a price of 32.5$ each. And dividing 32.5$ to the dropped price of each pair you'll get a result of 72544.64 spice and 0.080846bch. If you have noticed since bch have dropped in price more than the spice, the quantity of bch increase.

So therefore, token which has a massive drop has a higher quantity when you removed them on the pool.

CASE V. In this case we will discussed what will happen if one of the token or coin increase and the other one drop in price. Say bch increase to 30% and spice dropped to 10%.

So same procedure if increase, x 1.3, if decrease x.7

`SPICE=0.00064 (1-.1) = 0.000576$/spice BCH=670(1.3)= 871$/bch`

Now multiplying the Initial token that you pooled to the current decreased price.

`SPICE=78125 × 0.00048 =35$ BCH=0.074626866 × 871 = 65$`

As you can see from the above photo if the two tokens price go against each other, take note if they go against the same percentage; say +30% and - 30% your 100$ won't be affected but the one who have dropped on price has a higher quantity of token.

But if the price increase and dropped and does not have an equal change of rate in percentage, say +30% increase,-10% dropped. If the increase is higher than of the decrease your initial capital is more likely to have a 10% increase. But if the dropped is larger than the increase say +10% increase, -30 percent in drop, your initial capital will have a lesser value of -10%. In connection to this the token that dropped massively will have a a larger quantity of token than of the other pair.

So basically, Case V, is a lot more, work. Lmao. But I want you to see the thought in here,

If Token A increase let us say +x% and token B decrease say -y% you just have to add the two, consider the sign and divide them equally. If the answer is + you'll just add the multiplied value of initial price times the divided percentage. On the other hand if the answer is negative multiply it on the initial investment and that is your impermanent loss in $.

Say let x = 30% : y=-10%

+30% + (-10%) = 20%, dividing it to two, will give you a 10%, multiply that on your initial capital, then that would be your profit.