Read on Twitter
All of this AMM talk on Twitter is highlighting just how little people understand about Impermanent Loss. Because of that I really feel it needs to be talk about so we can set the record straight.
Here we go
#DeFi #Ethereum #Trading $ETH
Here we go
#DeFi #Ethereum #Trading $ETH
I am going to start this thread by saying... the term impermanent loss should NEVER have been created! Why? Because there is already a term for a pool that balances based on constant product. It's called... *drum roll* 
Constant Mix Strategy!
Constant Mix Strategy!
Constant mix has been around for as long as trading strategies have existed. It is simply a strategy that keeps a constant weighting of each asset.
Yes, it's true. The math behind IL, profit and loss curve, everything about this is old news.
Yes, it's true. The math behind IL, profit and loss curve, everything about this is old news.
Here on investopedia you can see the infamous "Impermanent Loss vs buy-and-hold" chart, except it is referred to by its actual name, Constant Mix.
https://www.investopedia.com/articles/stocks/09/constant-mix-buy-hold.asp
https://www.investopedia.com/articles/stocks/09/constant-mix-buy-hold.asp
People get IL wrong all the time. Things wrongly attributed to the IL (constant mix) include fee's, spread, block times (really? lol), price impacts, etc. None of that has anything to do with IL. IL is a formula with a known outcome independent all of those other things.
IL is an opportunity loss of doing 1 strategy vs. another. It's the outcome of mixed strategy vs buy-and-hold. But IL assumes you would buy and hold if not LP'ing. That's a bad assumption. People can/will make a million different trading decisions if not LP'ing.
If IL is an opportunity loss of doing strategy A vs strategy B then technically everything has IL. For example, In 2019 I bought a $10,000 PC. If I would have put that $10,000 in ETH I would have $40,000. Welp, $30,000 impermanent loss. 
"But it's not permanent until you pull your liquidity". yeah... that has another term as well, called "Unrealized PnL" and applies to literally every type of 2-way trade, not just IL/LP'ing.
So why would anyone be okay with a strategy that underperforms buy and hold in both directions... because profit is not the only parameter that matters in trading!
The other parameter is risk!
The other parameter is risk!
In a buy-and-hold as one asset outperforms the other the risk in one asset increases over the other. In a constant mix, the $ for $ volatility impact of each asset remains constant as the $ value of each asset also remain constant. CCPI is yet another strategy (for another day)
In summary:
-IL is a fancy term for constant-mix vs. buy and hold
-You can experience IL even if both assets significantly increase in price
-There is no way to prove someone would have "bought and held" which makes IL moot
-IL is a fancy term for constant-mix vs. buy and hold
-You can experience IL even if both assets significantly increase in price
-There is no way to prove someone would have "bought and held" which makes IL moot
-Mixed strategy has been used for ages and continues to be used by individuals, investment/insurance firms, etc. Particularly where targeting a specific Sharpe/risk-level is critical.
-Constant Mix is literally "buying low" and "selling high" which is the goal of many people.
-Constant Mix is literally "buying low" and "selling high" which is the goal of many people.
-Many investors and investment firms employ Constant Mix in their stocks & bonds portfolios, and without incentive outside of the strategy itself! LP's on the other hand are paid trade fees on top of the strategy. We should feel so privileged!
