Direct from the desk of Dane Williams.
The scenario where I’ll happily accept impermanent loss on my DeFi LP.
In the world of decentralised finance (DeFi), impermanent loss is a topic that often elicits strong reactions.
Many traders try to avoid it at all costs.
However, I view the concept of impermanent loss a little differently.
As I only enter hive Diesel Pools with a SWAP.HIVE side and view my positions exclusively as a way to build my HIVE stack faster, I’m actually willing to accept an impermanent loss for the greater good.
Hear me out here.
When am I happy to accept impermanent loss?
When IL% < APR%.
Remember, I’m using LPs to stack more HIVE.
So with that being said, all I care about is being in profit overall.
I don’t care what happens to the value of each of my sides because they are always going to end up back into HIVE Power.
In my mind at least, it’s nothing more than HP earning me a higher yield.
That means that I’m happy to accept impermanent loss when my IL% is less than the APR% that I’m earning on top.
Example using my SWAP.HIVE:SPS LP position
You can’t be on Hive and escape the doom and gloom surrounding Splinterlands and in particular, the price of SPS.
In both USD and HIVE terms, the price of the game’s native token has been on a slide.
That means that in my LP position, I’m taking an impermanent loss which will see me ultimately end up with less SWAP.HIVE and more SPS.
As someone who is using this LP to stack HIVE, not something I want to see.
Should I care?
Well, having started with 2000 HIVE and 2000 HIVE worth of SPS on the other side, my position now looks like this:
That’s -378 HIVE
And +3000ish SPS, which is now only worth 278 HIVE.
But while that impermanent loss sucks on the surface, when you consider the APR I’ve been earning and cashing straight into SWAP.HIVE, you’ll quickly see that I certainly shouldn’t care.
At 60% APR, I’ve made 1782 SPS this month alone,
All cashed straight into HIVE as I go.
That means just this month, I’ve made 163 HIVE to make up for my impermanent loss shortfall.
Say I’ve been in the LP for 6 months and have earnt +977 HIVE in rewards.
977 minus the 378 I’ve given away to impermanent loss is +599 HIVE for 6 months on my LP position.
Comparing that to the +400 HIVE I could have earned by simply powering up my HIVE and curating at 10%, you can see that I’ve come out on top.
+200 HIVE better for the period!
Yes I've taken some liberties with my math, rounding up and not taking into account the fluctuating APRs and prices for simplicities sake.
But the sentiment remains the same - I come out ahead.
Final thoughts on accepting impermanent loss
If I want to earn more HIVE, I’m better off being in the SWAP.HIVE:SPS LP and taking the impermanent loss rather than just straight powering up my HIVE.
Do you accept impermanent loss on your own DeFi LP positions?
Do you do so to try and stack HIVE faster than simply by powering up?
Let me know in the comments.
Best of probabilities to you.