Impermanent Loss (IL) on LRT pools
Introduction
This is a report on the performance of the LP on eETH pools on Pendle. We extend the definition of IL to yield trading market, and derive the relevant formulas for their computation. We then apply the concept to Pendle where we analyze the eETH pools.
Key Findings
This report analyzes the performance of two eETH liquidity pools:
- Ethereum pool: Launched on January 10th and observed for 50 days (until February 20th).
- Arbitrum pool: Launched on February 10th and observed for 40 days (until March 20th).
Ethereum Pool Observations
The worst performance observed in the Ethereum pool was a 2% impermanent loss for liquidity providers who entered the pool immediately after it was launched. This can be attributed to the pools’ initial volatility. However, any losses were negated by holding the position for 30 days or more. Generally, liquidity providers experienced no impermanent loss. Value of Etherfi points has not been accounted for in this analysis and would be expected to further improve liquidity provision results.
Arbitrum Pool Observations
The Arbitrum pool, launched later, exhibited greater stability, leading to more predictable outcomes. The recent Etherfi phase 2 campaign did influence impermanent loss in the final days of the observation period, giving a maximum loss of around 1%. Value of Etherfi points has not been accounted for in this analysis and would be expected to further improve liquidity provision results.
Methodology
Return in LRT
By holding PT and underlying, or LPing on LRT pools, users are expected to receive returns at maturity T from:
- Fixed yield from PT portion: This can calculated exactly.
- Float yield from SY portion: This can be estimated from the history rate.
- Reward from points: This is unknown for now unfortunately.
Impermanent Loss Calculation
Ethereum eETH Pool
LP from the first 3 days:
The PT price experienced a significant plunge in the first month due to hype-driven narratives of YT. Liquidity providers (LPs) faced impermanent loss (IL) during this period, reaching a maximum of 2% between days 23 and 25. However, this IL was recovered as the PT price started a substantial rise from day 30 to 35.
In contrast to the early period, liquidity providers (LPs) who entered after the initial PT plunge enjoyed significant returns compared to simply holding PT or underlying. These returns were high enough to compensate for any potential future price recovery of PT during the observation period.
LP from Day 4-Day 10
For LPs who entered the pool after, the brief period of underlying asset outperformance had minimal impact. They might have experienced a small impermanent loss (IL) of up to 1% around day 23 — day 25, but this likely recovered within a week.
Point compensation
We previously discussed the trade-off between holding PT and SY. While PT offers no point rewards, it avoids impermanent loss (IL). Conversely, holding the underlying offers the maximum potential point reward but is more susceptible to IL calculation. Possible financial compensation for accumulating points has not been considered in this analysis since it is difficult to quantify. This should be recognised when reading this report.
Arbitrum eETH Pool
In contrast to the Ethereum pool, the Arbitrum pool exhibited a more predictable trend due to a stable implied rate. However, the launch of Etherfi’s phase 2 campaign impacted this trend. The price of PT plunged in response to the implied rate, leading to a reversal of the positive trend in the Arbitrum pool.
Point Compensation
The point compensation mechanism in this pool is activated more frequently because PT holdings tend to outperform SY holdings over time.
For the early LP, the sharp rise in PT price during the first week caused a spike in the point compensation requirement for underlying asset holders who wanted to withdraw at that time. This phenomenon subsided as the price trend slowed and PT’s price increased gradually. However, with the launch of phase 2, the point compensation requirement started trending downward due to the significant decrease in PT price.
