Osmosis Governance recently approved another set of external incentive matching for the BTSG pools. I wanted to analyze how these pools perform if you ignore incentives: simply swap fees accrued vs impermanent loss.
When you put tokens in a pool, you're now investing in the GAMM itself. When people use the pool, the swap fees go to the GAMM holders, which increases the tokens represented by each GAMM.
With impermanent loss, your GAMMs end up representing more of the token that underperforms in a pool — but does that mean you have less money than if you had just held both tokens? Not necessarily! In this example, if you had invested in the BTSG/OSMO pool on October 31st (block 1,800,000 in the charts), your GAMMs would actually have gained 3.45% in value as of January 1st (block 2,620,000).
| Block | uBTSG | uOSMO | BTSG price | OSMO price | GAMM-573 value |
|---|---|---|---|---|---|
| 1,800,000 | 0.822 | 0.0735 | $0.483 | $5.40 | $0.000000794 |
| 2,620,000 | 0.977 | 0.0636 | $0.420 | $6.46 | $0.000000821 |
So the GAMM's performance is:
GAMM performance
And the impermanent loss would be calculated as:
Impermanent loss
Which comes out to:
Plugging in
The division by a million converts the BTSG/OSMO price to a uBTSG/uOSMO price. Note that the % loss is negative — this means we don't have any losses, and instead actually have an impermanent gain, though in this case it's a relatively small amount.
Again, note that this doesn't include external/internal incentives and the compounding of those incentives. That's because the incentives are temporary, and I wanted to compare the ROI of a pool to just holding the tokens. Hopefully SuperFluid Staking will come out and I can run these numbers again — assuming the OSMO portion is being staked — and compare that to just staking the individual tokens by themselves.
IL in action
We can expand this past our example case and view the IL of this pool in action by plotting the amount of Bitsong and OSMO represented by a GAMM:
uBTSG in a GAMM-573
Per GAMM share, by block height
uOSMO in a GAMM-573
Per GAMM share, by block height
Lastly, let's see how this IL impacts the price of the GAMM itself while the swap fees accrue:
USD value of GAMM-573
Value of 1,000,000 GAMM shares, by block height · dashed line = starting value
The two pool tokens have an inverted relationship, as expected due to IL. The USD chart follows a bit of its own pattern as it's focused on the USD value of the tokens more so than the amount of each in the pool. Eventually though, you can see the USD value of the GAMM overcomes IL and becomes more valuable than it started!
Takeaways
To summarize: when picking a pool to invest in, IL is definitely an important thing to consider. What people often fail to consider is the value of swap fees in balancing out IL. As we've just demonstrated, swap fees can be fairly effective at matching or overcoming IL! The most important things to keep in mind when picking a pool are the APR incentives — internal and external — plus how bullish you are on the assets in the pool.