Why Use Stable Coin Pools?

StakeSteak is an experimental project that gives liquidity providers (LPs) less exposure to the underlying assets’ price risks. Currently, swaps on fantom (ie.SpiritSwap, SpookySwap, etc.) route through FTM, which means that LPs are incentivized to provide liquidity in pools that contain two risky assets (FTM pairs). In this context, risky assets mean that both assets are at risk ofhigh price fluctuation.

For example, tokens such as Link and Sushi are paired with FTM, and providing liquidity to the SUSHI-FTM or LINK-FTM pair would result in exposure to both assets in the pool.

Let’s start off with an example, and we’ll use our friend Wojak.

Wojak has $1000 in disposable income. He heard his friend makes a lot of money by being a liquidity provider. Wojak decides to ape into a 300% APY LINK-FTM pool on Spiritswap without understanding the risks that he is getting into. Wojak believes that LINK is a pretty good asset, but isn’t really sure about FTM. However, looking at the juicy 300% APY, Wojak decides that providing liquidity for FTM can’t possibly be so bad.‌

Wojak provides liquidity to the pair at an initial price of $500 per LINK and $0.50 per FTM. By using his full $1000, Wojack entered the pool with 1 LINK and 1000 FTM.‌

After being an LP for a couple days and earning lucrative rewards, Wojak is happy that he earned $20 in rewards for very little work.

However, when Wojak decides to remove his liquidity from the pool, the price of Link has increased to $600, but FTM has dropped $0.30. Wojak expects to pull out 1 Link and 1000 FTM, which puts him at $600 + $300 = $900. This is a $100 loss from his initial investment, and he only made $20 from rewards, resulting in a net loss of $80.

To make things worse, Wojak is only able to pull out .71 LINK + 1414.21 FTM. The resulting value of his assets is $424 + $424 = $848, which puts the Impermanent Loss at 5.72%. By providing liquidity to the LINK-FTM pair, he ended up losing $132.

Wojak really wishes that he could have provided liquidity without being exposed to FTM’s price. Had the pool been LINK-FUSD(assuming FUSD is pegged to $1), Wojak would have made $20 in rewards + $100 in LINK price increase — $4.54 in Imperament Loss(0.41%) = $114.54.

The situation described above is one of many instances that I and other degens have experienced by aping in as a LP. The reason why ETH or FTM pools are typically incentivized by DEXs is because the underlying assets are correlated. For example in the SPIRIT-FTM pair, SPIRIT’s price tends to follow the price of FTM because SPIRIT is a part of the Fantom ecosystem. Providing liquidity for correlated pairs is good because it mitigates Impermanent Loss.

Check out this video if Impermanent Loss is still confusing: https://www.youtube.com/watch?v=8XJ1MSTEuU0

However, the problem for these correlated asset pairs is that the Impermanent Loss risk may be less of a problem than the risk of holding two volatile assets. People’s preferences for stable coin pairs is pretty evident from looking at the DEXs on Fantom (Stats taken at the time of writing this article on 5/18/2021):

  • USDC-FTM is the second most liquid pair on SpookySwap following the BOO-FTM pair (this is because BOO-FTM is incentivized 30x more than other pools). DAI -FTM is 4th most liquid and FUSDT-FTM is 5th.

Ultimately, it comes down to each user’s risk preference and giving users more choices for what they want to LP.

  • If you’re more scared of Impermanent Loss than the volatility of the underlying assets, LP for FTM pairs. There are plenty DEXs that provide incentives for that such as SpiritSwap, SpookySwap, and HyperSwap.

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