Cub Finance: Learning about Impermanent Loss and Liquidity Pools

By jfang003 | jfang003 | 9 May 2021


5-9 cub finance.png

I learned a few things during my first experience in liquidity pools in Cub Finance. Before this I only staked my CUB airdrop into the DEN so it was really simple so long as you had some BNB in your Metamask Wallet.

I decided to look into various things on Cub Finance because I believe in doing your own research. So I was surprised to see that there were things that I figured out but others did not in @leomarkettalk. The topic was about impermanent loss and it was about a post by @revisesociology@revisesociology mentioned that he did not want to be any more liquidity pools with BNB because of impermanent loss and the high chance of him losing BNB.

This lead to a discussion between me and @finguru where he thought we would not get any fees back for being in a liquidity pool in Cub Finance. You can find the chat here.
5-9 leomarket chat.png

Impermanent Loss

In this article about impermanent loss by Binance, they mention a few things about how you can lose money compared to just holding the tokens. The first way you lose money can be simply explained by the chart below from that article.

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Impermanent loss happens no matter which direction the price changes. The only thing impermanent loss cares about is the price ratio relative to the time of deposit.

So as they stated in the article, impermanent loss will always occur. So we will gain the most profit in a liquidity pool if the exchange rate stays constant. As for how much you lose, the article by Binance stated the following about the losses you can receive.

1.25x price change = 0.6% loss
1.50x price change = 2.0% loss
1.75x price change = 3.8% loss
2x price change = 5.7% loss
3x price change = 13.4% loss
4x price change = 20.0% loss
5x price change = 25.5% loss

Liquidity Provider fees

Whenever someone trades on the exchange, the trader pays a 0.3% fee which is added to the liquidity pool. Since no new liquidity tokens are minted, this has the effect of splitting the transaction fee proportionally between all existing liquidity providers.

An article about Uniswap mentioned by Binance talks about how Uniswap has a 0.3% transaction fee that is given to the liquidity providers.

5-9 liquidity provider fee.png

So this means on top of the APR you get from a farm, you also get liquidity fees added to your liquidity staked. When I checked the exchange link on Cub Finance, I see that the liquidity provider fee is 0.2%. So of the 0.2% fees you pay, 0.17% goes to the liquidity providers in the farms and 0.03% goes towards the treasury. I think the treasury means that it will be used by Cub Finance to burn LEO and CUB tokens.

Swap Example

exchange menu.png

In the above example, you can see the exchange on Cub Finance. I have put 1 CUB and I want to receive BNB in return. As you can see in the example, you can see the minimum amount received, the the estimated price difference and the liquidity provider fee.

So for a transaction of 1 CUB, I would pay 0.0017 CUB to the liquidity providers and then this is spread out to all the liquidity providers so the portion you may receive may be small. But every transactions adds more to your stake inside the liquidity pool. This will help alleviate part of your losses by impermanent loss.

Settings

One thing to note about transactions here is that there is a minimum amount you are willing to accept otherwise you will reject the transaction. In the previous picture, the red box shows where you can change this setting.

5-9 exchange settings.png

The settings allow you to set how much of a price difference and how long you are willing to wait for the transaction to go through.

Routes

If your exchange on Cub Finance does have not a direct swap on Cub Finance farms, then you may have to pay more in fees. This means you will have to go through multiple swaps to get your desired token.

5-9 routes.png

In the above example, I wanted to change CUB into bLEO but there is no CUB/bLEO pool. So in order for this exchange to happen, it must first exchange CUB into WBNB then exchange WBNB into bLEO. Since it requires two exchanges, the fees will account for both swaps.

Conclusion

I am still learning about Cub Finance and Defi in general so I may be mistaken about some of the information. If I am, please let me know so I can learn more about Defi systems. Cub Finance is my first Defi system and I trust the Leo Finance team behind it. Even though I am red from my first investment in a farm, I have learned a lot about Defi and I believe that it will work out based on a long term view.

Please feel free to leave a comment if you have any questions or feedback.

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jfang003
jfang003

Gaming and Crypto Enthusiast


jfang003
jfang003

Gamer and Blockchain Enthusiast

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