For completeness, let’s also present the numbers we get if we were to split IL equally between the two parties. The calculation is quite simple and has a very nice air of symmetry about it.
Back to our usual example.. On day 30, when the sides want to remove liquidity, ETH price is higher and is now $2500. When the LP tokens are burned, instead of the original 100 ETH and 200,000 USDC, we have 89.44 ETH and 223,606.80 USDC. Side A has a small loss over its principal of 100 ETH, and Side B has a small gain over its principal of 200,000 USDC. Can we find a number down the middle where both sides have the exact same loss over their principal?
The magic number is taking exactly 24,845.2 USDC and swapping it to ETH. This will give us 99.38 ETH and 198,761.60 USDC. This means both sides now share a slight loss. How slight? Exactly 0.62% over their initial principal investment. This 0.62% figure should be familiar — this is exactly the IL that we had earlier when doing standard double-sided farming.
Let’s run the numbers and compare to the tables above:
This strategy is very symmetrical and this is indeed quite elegant, but I have to say that personally I don’t like it. When doing single-sided farming, the two parties are never equal. Forcing symmetry, though elegant, is not necessarily a good thing.
The purpose of this post was to show how we can implement different strategies to share IL between two parties engaged in single-sided farming together. Each of these strategies may appeal to some and has advantages and disadvantages.
We’re not limited by these three alone. We can also mix them together and form interesting combinations, for example — take 50% of strategy 1 and 50% of strategy 3. So IL is not perfectly equal, but we do favor protecting the USDC side.
We haven’t mentioned the rewards when discussing these strategies either. If farming together yields 40% APY in SUSHI reward tokens, we still have an open question of how to divide the rewards between the parties. It makes sense to assume that if IL is not shared equally, so won’t the rewards. Naturally, the party exposed to more risk should also reap higher rewards.
If you’re curious about what we’re working on and don’t mind seeing work-in-progress that hasn’t been properly announced yet, feel free to follow us on Github:
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