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Crypto: Top AMMs to Pool Your Tokens with Minimal/No IL Risks

Impermanent Loss (IL) has always been the biggest concern for all liquidity providers (LP) when providing liquidity. Nobody enjoys seeing their pooled token balance dwindled while the price moons. Unfortunately, if the pool uses the "X * Y = K" equation, it is unavoidable.

So, in this post I discuss about what I think are some AMMs to consider LP-ing and how they deal with IL.

I will be using "ape level", a scale of 1 to 5, to gauge the amount of effort required to monitor their pool assets. 1 being LPs have to always keep a lookout and 5 being LPs can sleep on it.

1. Balancer v2

An AMM protocol OG, Balancer is a pioneer of another AMM tech of varying pool weightage. Only at Balancer that you can find all sorts of pool weightage like 80/20, 20/20/20/20/20, 60/40 etc.

Balancer recently released their version 2 which introduces a different pool architecture named vault. All tokens LP-ed will be stored in this single vault. Different pools of varying token weightage can be created on top of the vault and managed by smart contracts like the image below.

So, what makes this really great?

Traditionally, all AMMs requires LPs to supply equal amount of tokens meaning that if the intended total value supplied is $1000, it must consist of $500 DAI and $500 ETH value for 50:50 ETH/DAI pool blah blah blah. Every DeFi user should know this by now. However, that has changed with Balancer v2, you can choose to supply single asset or whatever desired amount.

Okay then?

Let's assume I'm short term bearish on ETH, I can utilize Balancer to earn some profit on their ETH/DAI pool. By now you should be familiar with IL (if not check out my explainer here), what happens if ETH price falls:

  • I supply ETH into ETH/DAI pool

  • ETH price falls

  • Based on x * y = k equation, arb traders will slowly balance out the pool

  • ETH quantity to increase while DAI quantity decreases

As a result, I should get more ETH when I withdraw on top of the liquidity mining rewards!

What's the risk?

Well, if I were to be wrong then I would lose some ETH due to IL lol so be very sure to know what you're doing before deploying this strat. Alternatively, an easier method will be finding a pool that I'm long term bullish for all the tokens. No matter the token prices, I can choose whichever token that gives me the highest quantity when withdrawing.

I've been testing this out on the Polygon network, supplied MATIC to whatever high yielding pools I can find. MATIC price has been going to shit in this bear market so my share of MATIC has been increasing lol. Overall, I would say this is an ape level of 2.5/5. It's a fantastic way to maximize IL to my advantage.

Before going apeshit and all in in one pool, remember there is slippage based on pool depth. Check out the Balancer docs here to learn more.

2. Bancor v2

Another AMM protocol OG, Bancor deserves to be on this list because they're the only AMM that provides IL insurance/protection (so far). LPs will never ever experience IL at all! How good is that?

The only condition: liquidity has to be deposited in Bancor pools for at least 100 days. After which, LPs can remove their tokens plus trading fees collected with no IL. This is made possible with an elastic BNT token supply.

How does it work?

Assuming that 1 DAI = 1 BNT:

  • I supply 100 DAI into 50:50 DAI/BNT pool

  • Protocol mints 100 BNT into the pool to balance out

  • Space for 100 BNT opens up in the pool

  • Someone else decided to take this opportunity and deposit 100 BNT into the pool

  • Protocol burns the 100 BNT it originally minted together with any fees gained

Just like that, LPs don't have to worry about IL because it is all mitigated.

Though I'm not entirely sure about their native token, like what happens to BNT if dogshit coin gets listed and goes to zero? How would BNT LPs be affected?

Screenshot from Bancor

At the moment apart from BNT, yields for other tokens have collapsed except for new pools like COMP/BNT which remains to be high double digits APY.

I give Bancor a 5/5 ape level as anyone can just ape in with no worries about IL. Looking forward to new developments with the upcoming Bancor v3 which will address the challenges faced in v2 and with additional rewards!

3. THORChain

Screenshot from THORSwap. Ignore the APY on ETH pool, it is halted.

The very first multi-chain AMM that bridges different blockchains together! THORChain is similar to Bancor, their pools are in 50:50 weightage and it must be paired with their RUNE native token.

What makes THORChain a popular choice for LPs is its enticing incentives. When traders perform a transaction, trading fees are collected and distributed back to LPs. The fee consist of three components:

  • Outbound fee

  • Slip-based fee

  • Network fee

What are they?

Outbound fee

A standard trading fee. If I swap DAI for ETH, a small percentage of ETH will be charged.

Slip-based fee

This fee is inversely correlated to the pool liquidity. If pool depth is low, slippage fee becomes high and vice versa. It's a really smart way to attract liquidity to a pool (high APYs)

Network fee

This is set at 1 RUNE.

Check out the docs here for more details.

Combined together, fees are more than sufficient to mitigate IL most of the time. It is not enough when price of one asset goes parabolic like RUNE which had a great bull run causing me to lose thousands of RUNE. Some Thor chad I saw on CT had it worse, losing 5 figs of RUNE tokens.

Since IL has been a key factor that discourages RUNE holders to LP, THORChain also implemented IL protection (inspired by Bancor) which compensates any IL incurred in value from the treasury. Likewise, full coverage can only be attained if LPs have pooled for 100 days (read more here).

So let's say that 1 RUNE = 5 DAI, I pooled 1000 RUNE and 5000 DAI. Price of RUNE goes parabolic, now my share becomes 500 RUNE and 10000 DAI. Does it mean that I will get 500 RUNE back if I withdraw after 100 days? Sadly nope, that's not how it works.

IL protection only applies when total pooled value is lower compared to just holding the tokens. Hence, best method to reduce IL would still be withdrawing in anticipation of huge price fluctuation which is easier said than done lol.

I give THORChain an ape level of 3.5/5 as long term RUNE bull LPs still have to be mindful losing their precious RUNE tokens. If your interest is money go up, then it's probably a 5.

I hope this helps to make hodling easier during this bear phase. Happy LP-ing!

Disclaimer: The information listed here is accurate at the point of writing. I am not endorsed by any of the platforms mentioned here. It is strictly my personal opinion and should not be regarded as investment advice. Please do your own due diligence.

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