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Last lesson we covered the composition of liquidity at the tick, with the main takeaways being:

While this in itself is a neat observation, when we add some numbers in we get some insight into a unique phenomenon of LPing - the wretched Impermanent Loss.

If you have 1 $ETH deposited into a CLAMM tick, you will hold 1 $ETH or $USDC roughly equal to your tick price (e.g. $1,750 tick will hold $1,750 or 1 $ETH).

If you are holding 1 $ETH, you will always have 1 $ETH.

The difference between these two values is what we call impermanent loss. Said simply, it is the difference in the value of your holdings when you LP as opposed to just holding spot assets.

In our scenario we will be looking at a single-tick CLAMM LP who has deposited 1 $ETH into the $1,750 tick. For the sake of simplicity, we will be using a singular tick price as opposed to a tick range (this will make it easier to explain as we can ignore the scenario where the position is part $ETH part $USDC).

A depositor who has 1 $ETH deposited in the $1,750 tick is essentially saying they are willing to have 1 $ETH or 1,750 $USDC in exchange for trading fees.

From their perspective, they are providing liquidity at this price point and do not care if they have 1 $ETH or 1,750 $USDC.

Now let’s pretend the price of $ETH has fallen below $1,600.

Since the spot price is now lower than $1,750, their position is fully converted into $ETH which is now only worth $1,600. Note that this amount is exactly equal to what they started with - 1 $ETH.

Now let’s pretend the price of $ETH has increased to $1,900.

Since the spot price is now greater than $1,750, their position is fully converted into $USDC at their tick price leaving them with exactly $1,750. Note that this amount is less than what they started with in $ETH terms since $ETH is now worth $1,900.

The CLAMM LP started their position with exactly 1 $ETH. Now as the spot price of $ETH moves, this composition has changed.

When the spot price was $1,600, the composition is 100% $ETH with 1 $ETH held which is exactly equal to the 1 $ETH they started with. The value of the $ETH has decreased but they still own 1 $ETH.

When the spot price was $1,900, the composition is 100% $USDC with 1,750 $USDC held. However, since the price of $ETH is now $1,900, their position is now only worth 0.92 $ETH.

That 0.08 $ETH that is lost is their Impermanent Loss (IL).

This can be represented below:

Look familiar?

Hmm…

This lesson we covered impermanent loss, which is the loss in a user’s holding due to the rebalancing of an LP’s position as the spot price of the asset moves. The important lessons we covered were:

And you would best believe that that IL graph looks mighty familiar… an option, some would say.

Until next time, my beloved readers.

Warm regards,

CEO

About Stryke

Stryke is a decentralised options protocol that focuses on maximising liquidity and enhancing gains for option buyers while minimising losses for option writers—all in a passive approach.Stryke employs option pools that enable anyone to effortlessly earn yield. The protocol provides value to both option sellers and buyers by ensuring equitable and optimised prices for options at various strike prices and expiries, achieved through our proprietary, cutting-edge option pricing model designed to mirror volatility smiles.

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