Is there impermanent loss for the strategy adding liquidity pool a few times at different price points and quit liquidity at one point of the different price points.
Is there impermanent loss for the strategy adding liquidity pool a few times at different price points and quit liquidity at one point of the different price points.
Somebody ask me a interesting question that “I added to a liquidity pool a few times at different price points… I’m having trouble coming up with an exit strategy. Say for example I added 100k at 0.05, 100k at 0.04 and 100k at .03…. I would want to exit the pool at .04 to have little to no impermanent loss?”
The question is very good. Maybe many people think it is a strategy to reduce impermanent loss because of adding lower price to reduce liquidity cost. However, this view is a misunderstanding of impermanent loss.
As we all know, the calculation formula of impermanent loss is:
If you added 100k at 0.05 for the position 1, 100k at 0.04 for the position 2 and 100k at .03 for the position 3…. I would want to exit the pool at .04.
The impermanent loss of position at 0.05 il1=
The impermanent loss of position at 0.04 il2=
The impermanent loss of position at 0.03 il3=
So your total impermanent loss= il1+ il2+ il3 <0, obviously you will suffer impermanent losses.
This is a very interesting phenomenon. Any new adding liquidity behavior can not reduce the impermanent losses. But what can we do to reduce impermanence losses for this strategy?
Here is a strategy to achieve it. After you added 100k at 0.05, 100k at 0.04 and 100k at .03,and then exit 100k at 0.05, 100k at 0.04 and 100k at .03 respectively. For this situation,
The impermanent loss of position at 0.05 il1=
The impermanent loss of position at 0.04 il2=0
The impermanent loss of position at 0.03 il3=0
So your total impermanent loss= il1+ il2+ il3 =0
As a result, you can achieve zero impermanence loss with the above strategy. Of course you can also achieve zero impermanent loss and single asset yield farming by our X3 protocol deployed on the Polygon testnet,
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Introduction Video: https://www.youtube.com/watch?v=w1aI2hgy6rQ
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