In the previous post, we analyzed the impact of dynamic adjustment of token weights on impermanent losses and gains. Although dynamic adjustment of token weights can help reduce impermanent losses, it increases trading slippage and finally reduces fee income. The overall income maybe not be higher than that of the fixed weight. But in the case of a fixed token weight, can the dynamic adjustment of the trading fee help reduce impermanent loss? In fact, according to the calculation formula of impermanence loss:
Impermanent loss is only related to initial price P0 and ending price Pn and has nothing to do with the trading fees. That is to say, dynamic adjustment of the trading fees cannot reduce impermanent loss. Impermanent loss is just only affected by price fluctuations. In other words, is it possible to make up for impermanent loss by increasing the trading fees?
So let’s compare the returns of the two token pools (WETH-USDC 0.05%) and (WETH-USDC 0.3%) on uniswap: the traders should pay 0.05% per transactions for the first pool and pay 0.3% per transactions for the second pool.
We found that the daily rate of return of (WETH-USDC 0.05%) is 0.036%, while the daily rate of return of (WETH-USDC 0.3%) is 0.032%. The rate of return increasing with decreasing of the trading fees, indicating that increasing the trading fee can not compensate for impermanent loss more. The trading fee difference in percentage between the above two liquidity pools is 6 times, and the final yield is only 0.004% different in percentage. Therefore, it is difficult to make up for impermanent losses by dynamically adjusting the fee.