Hanging out in the Illuvium Discord, I see the same questions constantly. While it’s exciting to see people continually discover a project that I’m very passionate about, there’s a lot to learn, particularly if you’re new to yield farming. Over the next several posts, I’ll compile the most frequently asked questions and answers on major Illuvium topics ranging from basic to more advanced questions.
Today, we’ll look at one of the most complicated and complex topics – the Sushi Liquidity Pool.
What is the Sushi Liquidity Pool?
The Sushi Liquidity Pool (SLP) is one of the core staking pools for Illuvium. Unlike the ILV core pool where you only stake the ILV governance token, in the SLP, you are required to first add liquidity to the ETH/ILV pair on Sushi.com. This means dividing your desired investment in two, buying half of your investment in ILV, and leaving the other half in ETH. You also need to ensure you have $200-$300 additional ETH for transaction fees at reasonable Gwei prices (less than 80, preferably less than 40). Upon pooling your ILV and ETH, you will receive SLP tokens. It is this token that you take to Illuvium.io and stake in the Core – Sushi LP. Select your lock up period from flexible to 52 weeks, pay another big transaction fee, and now watch your ILV reward balance increase. Step by step instructions can be found here.
What are the risks of the SLP?
The biggest risks are impermanent loss (covered here) and smart contract risk (such as sushi.com being hacked and a vulnerability found in the pool that enables funds to be withdrawn. Higher rewards are needed to offset these increased risks.
What is impermanent loss?
An incredibly common question, I shared an in-depth look at impermanent or divergence loss here in a three part series to understand the loss, how it works, and Illuvium specific examples to understand the impact. In short, due to how automated market making works, the more the price ratio of the two assets (ILV and ETH) diverge, the greater loss you will encounter relative to just holding and not pooling the tokens. When you exit the liquidity pool, you will receive fewer of the token that appreciated more in price than you initially pooled. Check out my articles, or other resources on the topic here.
Wow! 500% APY – if I invest $100, I’ll earn $500 in a year!
Not a question, but a common misconception for both core pools. Particularly since stakers are given the option to lock their tokens for extended periods of time, it’s not unreasonable to presume that the initial APY is locked for the duration. This is NOT the case, and APY is quite dynamic, particularly for the SLP. The APY is really more of a snapshot, or a speedometer of your current rewards rate. Each day, there are a set number of tokens that are distributed, and the number of staked tokens and their weight determines how many rewards each stake receives. As people enter and leave the pool, the reward rate changes.
Do I earn interest on the full value of my SLP investment, or just the ILV portion?
Yes! You earn rewards based on the total current value of your SLP, both the ETH and ILV portion. Complicating APY for the SLP, rewards are paid in ILV, while your investment is pooled ETH and ILV. Your total investment “counts” for the APY, so you can determine your current value either by taking your number of SLP and multiplying by the current SLP price (available here), or go directly to your Illuvium staking dashboard (here) to see your current value. Below is the equation to determine your predicted reward ILV today.
Basically, take the value of your TOTAL SLP (including both ETH and ILV) and multiply by the APY, and then divide by 365. This is the value of ILV you expect to receive today. More important to me is the number of ILV that I receive, so divide this by the current ILV price. I track the daily trends in reward ILV for both pools here.
Most importantly, don’t fall into the trap of thinking your APY is fixed, and it is highly likely to decrease (significantly) over time.
How much does it cost to get started in the SLP?
When evaluating an investment in SLP, first consider the total value you want to commit. Next, ensure that you account for all the associated fees. For the SLP at reasonable gas, expect your total transaction fees to be between $200-$300 at reasonable gas (see Vetemore's calculator here). Therefore, if your planned investment is less than $300, don’t expect to have any value make it to the pool. Due to these high fees, larger initial investment are recommended for the SLP. The ILV pool staking fees are about half of the SLP, so consider that route if you want to stake, but lack the funds to make the SLP worth it.
Can I add more to my existing SLP stake?
You can’t add to an existing stake, but you can create a second stake with its own lock-up period and transaction fees. Let’s say you staked 1 SLP for a year, and a month later, you have another $3000 you want to stake. You can go through the process again to buy, pool, and stake. When you stake, you will have the choice of lock-up period, and can again choose a year, or any length of time from flexible to 52 weeks.
An important thing to note – all claiming transactions are tied together. Your available rewards in the two core pools will be combined, so if you have multiple SLP stakes, any time you click claim rewards, it will claim from all of your pools, and it does not require separate transactions for each SLP stake.
How much does it cost to claim rewards?
The SLP has higher fees any time you want to claim rewards compared to the ILV pool. Based on my experience, expect fees between $60-160 at reasonable (30-85 Gwei) gas prices per claim event (calculator here). Make sure you check out the next incredibly related FAQ.
Can I claim just my SLP rewards? Do I have to claim my ILV pool rewards? OR Why did I get two transactions when I claimed?
This is one of the more confusing things and a mistake that I’ve seen a number of people make. First, you will almost always have more rewards in your SLP than the ILV pool. ONLY EVERY CLICK CLAIM ON THE SLP! By claiming from the SLP, you will automatically claim your available ILV pool rewards. It will be two transactions, and you must approve both in your wallet, or you won’t actually claim your rewards. Even if you have a super small reward amount in your ILV pool, you will claim them. There is no way to avoid this. Please make sure you approve both transactions to avoid wasting gas. Always make sure claiming makes sense, and the value of your interest earned from compounding will exceed your gas fees.
Can I split my rewards claimed between sILV and ILV?
No. Each claim event requires you to select either sILV or ILV. See the previous FAQ to know how to claim. If you want both sILV and ILV, you will need to conduct multiple claim transactions (and gas fees) to obtain your desired mix of sILV and ILV. Make sure splitting your claim is worth it! Occasionally, you may see a small amount of "dust" sILV (<$0.01) when claiming ILV. Don't stress out if this happens.
Can I move my stake to a hardware wallet?
Once you are staked and locked, you cannot move to a hardware wallet until your lock up period ends. You can stake from your hardware wallet initially, and that is recommended from a security standpoint. If you are already staked, you cannot access your SLP until the end of your lock-up period. At that point, if you want to move to a hardware wallet, you will need to unstake, move your tokens to the hardware wallet, and then restake, should you so choose. See the next FAQ, as you will lose your pool weighting by withdrawing your SLP.
Do I earn rewards after my lock-up period ends?
Once you stake, you are locked at that pool weight until you withdraw. This is a huge benefit, particularly for those who choose to stake for longer periods of time. Yield farming will last until mid-2024, and if you leave your tokens staked, you will continue to earn at your initial weighting factor until you withdraw. This weighting factor also applies to revenue distribution. For example, if you locked for 52 weeks in July, you will continue to earn at 2x weight until you withdraw, not just until July 2022. If you locked for six months, you will receive 1.5x weight for both yield farming and revenue distribution until you withdraw.
You merely gain the option to withdraw your original tokens at any point after your lock-up period ends, but you certainly don’t have to.
Am I eligible for Revenue Distribution by staking in the SLP?
Yes! Everyone staking is eligible for revenue distribution based on their number of “owned” ILV. The SLP makes this more complicated, as your actual number of ILV is dynamic. To determine your current number of ILV associated with your SLP tokens, take the current SLP price (here), divide by 2, and then divide by the current ILV price.
For example, let’s say you have 3 SLP tokens staked. If the SLP price is $3000, that means $1500 of each token is ILV. If the ILV price is $500, that means each SLP consists of 3 SLP. Total, you would own 9 ILV from your SLP tokens. Those will earn revenue distribution and provide DAO voting rights.
Do I earn swap fees from the Sushi pool? How do I claim those?
On Sushi.com, pooling generates fees, as every swap transaction that leverages the pool costs the swapper 0.3%. Of this fee, 0.25% is automatically added back into the liquidity pool. This causes a slight increase in the SLP price. No action is needed by the holder of the SLP to gain this benefit, and when you ultimately sell your SLP, you will receive all these transaction fees. You can look at the pool statistics, specifically pool fees and utilization here. To estimate your share of these fees, take your total value of SLP and divide by the total liquidity pool size in dollars. This is your percent ownership of the pool. Then multiply this percent ownership by the 24 hour fees to determine your share. Technically, this fee number includes all 0.3% fees, so take this number multiplied by 0.833 to correct for the fees that are paid to individuals staking SUSHI token.
For example, say you own $10,000 in SLP, and the total pool size is $200 million. You own 0.005% of the pool. If the daily fees are $10,000, you are earning $0.42 (0.005% x $10,000 x 0.833) per day in swap fees.
Why incentivize the SLP so much?
The total yield farming reward ILV is divided across the two core pools, and occasionally Flash pools. Ignoring the occasional 2% dedicated to the flash pools, the rewards are divided 80% for the SLP, and 20% for the ILV pool. You may ask yourself why the DAO has decided to reward the SLP so heavily relative to just staking their own governance token. There are several reasons. First, there is a need for liquidity to maintain ongoing operations. As the intent is for the DAO to distribution 100% of all revenue to staked/locked tokens in the form of ILV purchased on the open market, there is a need for ongoing liquidity. Since this revenue distribution (or revdis) model relies on available ILV, and revdis heavily incentivizes staking, it is essential that not all circulating ILV are locked in staking. The ILV pool is essentially a dead end. There are currently a little over 600k circulating tokens, and this will stay constant until team and seed tokens begin their unlocking period in March 2022. If all 600k became locked in staking, there would be no liquidity. The DAO has already stepped in and has pooled some of their treasury tokens to start the Sushi pool.
As of today, around 500k of the 600k circulating tokens are staked with Illuvium. These are divided with about 300k in the ILV pool and 200k in the SLP. (This ILV pool number neglects the rewards claimed that are within their 12 month vesting period) If all 500k staked tokens were only in the ILV pool, only about 100k ILV would remain in circulation, causing liquidity shortage issues such as major price swings. The model of the Vault purchasing ILV to distribute revenue would be a huge challenge as well. If only 100k ILV were present in the liquidity pool when the land auction happens, the DAO’s ILV purchase would be hugely impactful on price. By promoting liquidity, the DAO is aiding long term success of its model.
Staking in the SLP is actually an infinite loop and has no size limitations. For example, a significant portion of the liquidity pool is already staked with Illuvium. However, someone could go to Sushi today, buy ILV (swap ETH for ILV), pair it with ETH, and add it back to the pool. The number of ILV in the pool stayed the same, but more ETH was added and new SLP tokens are created. Each time this happens, the ILV and SLP price increases, but no more ILV are actually pooled. This cycle can happen infinitely to the benefit of all ILV holders, while there are only a finite number of ILV that could be staked in the ILV pool.
Higher rewards are also necessary to incentivize those providing liquidity due to general smart contract risks and impermanent loss (IL). By providing liquidity, ILV bulls are giving up potential return on their investment due to IL, and if the ILV price increases more relative to ETH, upon exiting the liquidity pool, one would receive fewer ILV tokens than initially pooled. Higher rewards must make up for this added risk.
That’s my list of FAQs on the Sushi Liquidity Pool. What did I miss? What other questions do you have? Leave a comment below or connect with me on Discord. Thanks for reading and for your support.