Protect your DeXe farming rewards by monitoring your impermanent loss with yieldwatch.net
On Monday the DeXe.Network announced farming DEXE and CAKE on PancakeSwap. The farming went live soon after.
If you are one of the many people who have stepped into the DeFi crypto space, then you’ll almost certainly have heard of impermanent loss. Impermanent loss is one of those terms that everyone chucks around but few people understand. Thankfully there are some really helpful ways to explain and calculate your impermanent loss when it comes to stake your LP tokens for farming. I shall explain.
Impermanent Loss
Impermanent loss happens when the price of your tokens changes compared to when you deposited them in a liquidity pool. The larger the shift in price, the bigger the loss. So in effect, unless you are using stable coins exclusively, everyone experiences impermanent loss at some level. So listen up.
The first sign that you’ve experienced impermanent loss is when you see the number of liquidity pool tokens go down. Unless you understand impermanent loss, you are likely to react negatively to this phenomena. In essence, impermanent loss is a temporary loss of funds occurring when providing liquidity. It’s very often explained as a difference between hodling an asset versus staking the asset as liquidity. Impermanent loss is usually observed in standard liquidity pools where the liquidity provider (LP) has to provide both assets in a correct ratio, and one of the assets is volatile in relation to the other, for example, in a PancakeSwap DeXe/BUSD 50/50 liquidity pool.
Example
Let’s assume you want to stake your DeXe Tokens in a Liquidity Pool which in exchange would produce LP Tokens which can then be farmed.
In order to do this in the pancakeswap pool shown in the example you would first need to swap half your DeXe tokens for BUSD so you have roughly the same value of both DeXe tokens and BUSD tokens.
I have 1000 $DEXE worth $20000 BUSD so I swap 500 $DEXE for $10000 of BUSD which leaves with $10000 worth of $DEXE and $10000 worth $BUSD.
I then add both coins in the relevant liquidity pool. Here is the screenshot of the pancakeswap method.
Once you’ve added your tokens you’ll receive in return DEXE-BUSD LP Tokens to the value of your total balanced liquidity in a ratio of 50/50.
So what happens if the price of DEXE goes up on the relevant exchange like binance. This is where other market participants, called arbitrageurs, get a say in your impermanent loss. An arbitrageur notices the price difference between binance and Pancakeswap and sees that as an opportunity to make profit. By cheap from one exchange to sell high on another.
This then shifts the price away from the value that you originally staked. Other market conditions can of course adjust the price of a token so there are many risks at play here.
The result is that the number of individual DEXE tokens within your LP Token will adjust to ensure that the overall ratio stays the same. So if the price of DEXE goes up by 10% to $22 it would look like this:
Original — 500 x $DEXE & 10000 x $BUSD
Now — 454.54 x $DEXE & 10000 x $BUSD
The token ratio has changed but the value ratio remains 50/50. If this happened instantly and you’ve not had enough time to earn commission from transactions in the pool you would have an impermanent loss of (454.54 x 22)-(500x22) = $1000 (the value of profit you would have had if you had simply held your tokens in your wallet.
Of course, this impermanent loss would be offset by commission earnt from your percentage share of the pool, and also a shift in the number of BUSD you’d have as the pool readdresses the balance. The longer you stake your LP tokens the more fees you earn too. My live example below is more helpful.
A helpful summary of the rates of ImpLoss can be see here:
a 1.25x price change results in a 0.6% loss relative to HODL
a 1.50x price change results in a 2.0% loss relative to HODL
a 1.75x price change results in a 3.8% loss relative to HODL
a 2x price change results in a 5.7% loss relative to HODL
a 3x price change results in a 13.4% loss relative to HODL
a 4x price change results in a 20.0% loss relative to HODL
a 5x price change results in a 25.5% loss relative to HODL
How can I keep an eye on my impermanent loss?
Well there is good news! Firstly, if you are using the Binance Smart Chain instead of Ethereum then boost and enhance your liquidity pools and farming by using services such as Beefy.Finance.
And then check out one of the many calculators online that can display the ImpLoss data. I use yieldwatch.net which has a great breakdown of your earnings against ImpLoss. Here’s an example of my DEXE-BUSD LP Farming data:
Here it shows that I have -31.05 BUSD ImpLoss, but have earnt considerably more in trading fees, LP and Vault earnings. So my next result is 102.34BUSD. Nice! It’s worth mentioning that this was only after 1.42 days.
Notice how the number of DEXE tokens have actually gone down because of the price change, but the number of BUSD has gone up to balance the value ratio.
On yieldwatch.net you’ll also get a summary bar —
And data from your various farms —
Which makes it really easy to keep tabs on where you are with your pools and farms.
- note — you can see how lucrative the DEXE-BUSD LP is at the moment. I am using beefy.finance to enhance the utilisation of my pancakeswap LP.
Anyway, I hope you have found the article helpful remember this is not financial advise. You MUST do your own research, and be aware the DeFi scene is far from risk free.
About DeXe
Dexe.network is a decentralized social trading platform that operates via autonomous smart contracts and includes tools for virtual currency allocation and automatic rebalancing. It eliminates the risks of transferring digital wallet details such as private keys and API or any virtual currency data to a third party. Most importantly, the DeXe Network connects successful traders and followers in a transparent, verifiable way for the benefit of both groups.
About Beefy.finance
Beefy.finance was created by a team of developers whose mission is to make the whole DeFi sustainable in the long-term and easy for anyone to participate in. They are inspired by the yield optimization projects created by Andre Conje’s yearn.finance and are bringing those mechanisms to the Binance Smart Chain (BSC) and PancakeSwap.
About YieldWatch.net
yieldwatch.net is a smart yield farming dashboard that lets you monitor your liquidity pools, yield farming and token staking performance with a casual and sleek UI, which is optimised for mobile use. Just like the lifeguards in Malibu watch over the swimmers, we watch over your yield.
With yieldwatch.net you get all the relevant information at one glance. No more browsing to different websites and using complicated IL-loss calculators. We are the first on Binance Smart Chain that show you the deposit, pending yield, fees generated and give you an overview of the potential impermanent loss that you are facing.
Stay tuned for more with us!
DEXE Website: https://dexe.network
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DEXE Official telegram EN chat: https://t.me/dexe_network_official_chat
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DEXE LinkedIn: https://www.linkedin.com/company/dexe-network
DEXE Twitter: https://twitter.com/DexeNetwork
