80/20 Pools

Impermanent Loss Dynamics of 80/20 Pools

Understanding 80/20 Pools

The design of AMM pools allows for various weightings of assets. One such configuration is the 80/20 pool. These weightings can influence the potential gains or losses a liquidity provider might face, especially concerning impermanent loss.

Scenario Recap:

• Starting Configuration:

  • ETH priced at $1,500. For this pool, we have 1 ETH amounting to $1,500.

  • JLY priced at $0.5, thus, 12000 JLY tokens equate to $6,000.

  • The total liquidity provided is $7,500, dominated mainly by JLY due to the 80/20 weighting.

• Price Evolution:

  • Assuming a similar price trajectory as the 50/50 scenario: JLY’s price surges, and ETH also increases but at a different rate.

  • The greater weightage of JLY means that any significant price movement of JLY will have a greater impact on the value of the pool compared to ETH.

Impact on Impermanent Loss:

• Invariant Mechanics:

  • Just as with 50/50 pools, the key concept is the invariant. This mathematical constant defines the product of the quantities of tokens in the pool.

  • Due to the asymmetrical weights, the impact of price changes on the pool’s value and hence the impermanent loss will be different.

• Comparative Analysis:

  • With the 80/20 weighting favoring JLY, the impermanent loss when JLY price surges will be less severe than in a 50/50 pool.

  • To be specific, the losses are cut nearly in half with a factor of 0.5825. In high-value pools, even this fractional advantage can amount to significant savings.

Conclusion:

The design of 80/20 pools inherently gives more weightage to one asset, making the pool less susceptible to impermanent loss from that particular asset's price movements. If an LP anticipates more favorable price movements in one asset over another, an 80/20 pool can offer a strategic advantage over a 50/50 pool.

However, it's crucial to understand that the impermanent nature of the loss remains. Price reversals or movements that bring asset values closer to their original state can still neutralize the loss. This phenomenon holds true regardless of the pool's weighting. Thus, while 80/20 pools can offer a shield against impermanent loss, understanding the assets and market dynamics remains pivotal for liquidity providers.