Impermanent Loss Exposition for early HNY LPs

A short message to share some concerns related with exposition to possible impermanent losses as a HNY LP in case HNY 10x in the future weeks / month.

Is there any option / idea that could be implemented to protect LPs in this early phase?

Being part of 1Hive Community, I am very happy to provide Liquidities but this exposition does preoccupies me.

I am sure this topic has been raised by many but I could not find a clear position / answer.

Idea: having a coverture fund for early LPS in case HNY sky rokets might help to solve this issue.

Your thoughts / feedback are more than welcome.

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Hi @Herve

I had the exact same concerns and wrote a proposal here on Discord:
1Hive Discord LP discussion

Basically I think early LP-ers should get rewarded for taking risk and having over 20% IL, which is far more than the trading fees have covered.

I assume you have similar thoughts about this? I will prepare a separate forum post (proposal) with these ideas, but any additional thoughts/comments are welcome so I can add these.

Well when Honeycomb comes on-line (2 weeks?) and uniswap LP pairs are funded with any reasonable HNY rewards basically this would offset impermanent loss.

One thing I want to point out here because it seems people are massively focused on USD value of their holdings. In most pairs people are providing for there is a base value unit they are optimizing for (either wETH, or xDAI) - some people might just want more HNY.

My point here is that if you own liquidity in the HNY-xDAI pair and HNY 4x’s you basically will get a sqrt(4) - 2 times increase in value. If it HNY 4x decreases your value drops by 1/sqrt(4) or 50% not including any fees or LP rewards.

What being in a pair with one side pegged to stable value does is reduce your potential gains as compared to holding the assets separately, but it also reduces your losses if the price drops, both by this square root factor. In effect holding your Honey with xDAI in a pair reduces the volatility in the total value of your holdings and gives you a fee return that if the price ever returns to where you deposited becomes the return on the liquidity you provided.

Personally I consider this a better way to hold an asset if you want to get some return with reduced volatility (less risk), any additional return provided by the Hive to incentivize Liquidity Providers in uniswap is a bonus overall and should in most normal cases far and away give more return than just the .3% on fees* volume.

.

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I agree. Providing liquidity is a way for me to mitigate risk and earn fees.
When Honeycomb launch, it should offset impermanent loss and I’m not sure rewarding early liquidity providers now would be fair, especially with yield farming coming. Maybe we can rethink this once the protocole is more mature but I think yield farming will be a way to reward early liquidity providers as well as a way to bring more liquidity.

Hi guys,

I understand both of your position.
My objective as an early LP to the Honeyswap project HNY/xDai or HNY/STAKE for example, my hope is to accumulate more HNY. Let’s say HNY 10x in the future months - Most of my HNY will be transformed to xDai or STAKE. I was thinking that we could create a HNY Fund to cover this risk in case this happen. Offering a HNY coverage equivalent to this pissible loss so LPs can still get their HNY liquidating the paired currency through the “insurance coverage contract” … Let’s think the best way we could solve this issue or hedge this risk.

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I don’t like this view of honeycomb as compensating some risk to LPs for many of the reasons mentioned above. LP tokens are already much lower risk tokens than the naked cryptocurrency. The only reason people are upset rn is bc HNY has skyrocketed, but I’m sure they would not be upset as liquidity providers if the HNY price dropped 50% or 75%. There is also a yield to the pools (which rn are quite generous due to high volumes vs liquidity, many offering high double digit or even triple digit yields)

This is the risk of the position and the 1hive DAO should not be trying to make LPs have all of the upside of the naked token without any of the downside.

Instead the goal of honeycomb and the liquidity incentives are to incentivize new liquidity to move to xdai and enter targeted pools that the DAO deems necessary. This is also why I am against any scheme to pay LPs for liquidity in the past. It does nothing to improve current or future liquidity, it costs the DAO money, and these LPs are already being generously compensated in price accrual and very high APYs.

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Good evening Befitsandpiper,

Thank you for your insights. Since I am not an expert in LP, can you please help me to understand how the LPs access to their compensations? If a LP could receive his transaction fees in real time we could reinvest them in HNY or other asset of his choice on a daily bases… though hedging the impermanent loss exposure. Looking forwards to your clarifications. Thanks

The LP transaction fees accrue in the pool in equal value as both tokens of the pair. If you wanted to increase your exposure to a particular token you would have to withdraw some of your LP tokens and use the funds to buy your token of choice. I think the transaction fees are accrued more or less in real time, on a per trade basis.

This value is accrued as a 0.25% fee for traders trying to buy or sell against the pool where your liquidity is held.

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I couldn’t afford to keep losing HNY in the LP. I do like to help with the project by adding LP. I hope we start the discussions to draw in more people.

It appears to me that your rewads for being an LP are paid to your pool token position. Your pool tokens will increase as time goes on, not your balance in each of the two pairs. I entered a position on hny/xdia pair. My pool tokens were 198.4 at the start and are now 258.5 The position is 4 days old now.

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6.4 hny to 6673 xdai was the start and 198.4LP. Now, 11.495 hny and 6371.5 xdai with 258.5 LP. My IL atm is only about 600$ right now with a 40% price decrease.

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I think it’s really best to think of liquidity tokens as a position independent of the underlying currencies in the pair. While yes, during a rally you lose money in one of the tokens vs holding that token by itself, you do not lose total US dollar value due to rallies. You participate both less in upside and downside movements in exchange for a yield.

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Ok wow! thats hughe sounds like i should have never pulled out ?

OK, I bought 10 HNY at $67 and add to the LP because of the movement on the price of HNY I was experiencing a loss of HNY. But this is still new to me it seems like I should have kept my position ?

Perhaps adding a rebase feature to the Honey token could def help with IL. I know it’s not a quick fix, but I’d say we’re still early stages even in 6 months or so, so there’s time

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Rebasing is not good a solution imho. It doesn’t solve the actual IL problem and opens us up for all kinds of smart contract problems and flash loans attacks.

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If you got 10 HNY at 67, you should be happy in any case :slight_smile:

You can check the IL with this calculator:

So, yes, you would have had a lot more if you had just kept out outside of the pool, but you might have sold a lot on the way up. Also you will have made a decent amount in fees as well, which you can check here:


(just fill in your account and magic happens).
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Can you elaborate on that? you’ve got me curious

edit: and yes good point IL is def like selling smoothly on the way up, dumping on the way down. I don’t think it’s a bad thing per se, it’s just not suited for all. I believe with crypto we can always suit all, we just need to figure out how lol…

Thanks a lot for the common sense man.
I think a lot of people need simple explanations like you provided above

See you in the forum.

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Check these threads out, but a good Google on rebase attack should unearth more discussions.


(About the SYFI rebasing exploit)

and for example:

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