Modelling Liquidity Providing (LP) Profits

Impermanent loss is not an actual loss : It just means that you'd earn less then if you had staked single tokens instead of liquidity providing however it only occurs typically when token prices rises above 150%.

We've created a google sheet that would allow you to easily model potential LP profits compared to staking single coins

Google Sheet Link

Example 1 : CHR-BUSD LP Pair

CHR (Chromia) is a relational blockchain used for L2 and many upcoming blockchain games, such as My Neighbour Alice and CHR has also announced an 80 MM USD grant program to further develop their ecosystem.

The CHR-BUSD LP pair on PCS has the following parameters

• 10% LP trading fees in the CHR-BUSD pair

• 40% LP farming rewards in the CHR-BUSD pair

Assuming we invest 1000 CHR which is worth $560 at the time of this post and 560 BUSD into the LP for 1 year, we input that into our sheet parameter as follows

As CHR has a 25% staking reward if you stake the token, we use this value to set Token A staking APR and because the other pair is a stable coin (BUSD), for token B we use a starting price of $1 with 0% starting change and step. From coinmarketcap we know that the average yield for depositing stable coins is ~3%, hence we set that as our token B staking APR.

Using the above params, we simulate what would happen if we invested $0.56 x 1000 x 2 = ~$1120 worth of capital into the LP compared with staking the individual tokens over a set period, the sheet will then generate the following table values

And the following chart

From the above chart we see that the CHR-BUSD LP profits would beat staking single coins if CHR moves stays between -75% to +150% in range, this shows that LPs provides massive downside protection.

Example 2 : BNB-BUSD LP Pair

Since BNB has a staking reward of ~10%, we input that value into the parameter and assume we initially create the LP with 100 BNB and 53,000 USD.

The generated chart shows that if you invest in the BNB-BUSD LP, BNB price needs to drop by more than 60% for you to suffer a loss. The LP pair will also perform better than staking BNB and BUSD up until BNB rises more than 170% in price.

On both LP pairs we analyzed, the theme is similar, in that if you stake LPs for a long enough duration, it will beat holding single coins in more than 90% of market conditions while protecting your investment from downside risk.

The examples above are stable coin quoted pairs though the google sheet can also model non stable quoted pairs such as CAKE-BNB. Using a non quoted stable pairs will reduce the "convexity" or the parachute affect of slowing down the loss in a downtrend, though it will also accelerate the gains in an uptrend.