and the price of Cub goes to $20 then the value of the pool would be $2M CUB and $1M BUSD
The price of CUB can't go to $20 until the ratio in the pool changes to 20:1
It's also impossible for an LP to ever be off balance. Both sides are always equal in value in terms of USD. Add to one side, subtract from the other.
I don't think that's necessarily true. Say Cub got listed on Coinbase. It would be very possible for the price of Cub to go up or down completely independent of what was trading in the LPs. If the price goes up, arbitrageurs would come in and equal out the LP's again with the new price so they matched. That's the part I'm not sure about. How do they do that? The arbitrage they make is what becomes the LP holders impermanent loss plus transaction fees. In other words, the arbitrageurs "skim" a little of the profit out of the LPs so the LP holders don't make as much. I agree, the asset won't go to $20 with the LP asset staying at $10. Arbitrageurs will come in way before that to even it up again. I was just using round numbers to make it easier to do the math.
To offset impermanent loss, many LPs incentivize farmers by offers rewards. In our case those rewards are Cub. The extra Cub farmed protects the LP holders from impermanent loss due to the price fluctuating on one or both assets if you're using something other than a stablecoin.
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The arbitrage they make is what becomes the LP holders impermanent loss plus transaction fees. In other words, the arbitrageurs "skim" a little of the profit out of the LPs so the LP holders don't make as much.
This is 100% false. Many articles that try to explain impermanent loss do phrase it in this weird way though. It's not suddenly possible for people to extract value out of an LP pool just because we get a centralized exchange listing. Impermanent loss 100% occurs because coins in the LP are for sale and they are being bough and sold at market value on the curve.
Think about it this way: Impermanent loss is impermanent. If the price goes up, LPs take the loss, but if the price goes back to where it was, there is no loss. Did the arbitrageurs give the money back? lol... I don't understand why so many websites try to push that obviously false narrative.
Arbitrageurs don't make any money off of the LPs: they make it off of the liquidity located on the centralized exchange. This is very obvious just from the fact that impermanent loss is impermanent.
Right, but my understanding is there is an automatic balancer. At a certain divergence in value between the two assets, it will automatically buy or sell one or both of those assets to rebalance the pool so they are equal again. Impermanent loss is the difference between what you get when liquidating your pool stake vs what you would have had if you'd just kept the two assets outside the pool. If one asset goes up in value, the balancer (arbitrageur) will sell some of it into the asset on the other side. This transaction has a fee associated with it as they are buying/selling that asset from somewhere else to put back in the pool and keep it balanced. Whether that fee is from the exchange they're buying it from or whether there's a fee charged by the balancer itself, or both, I don't know but...that's where the impermanent loss comes from.
I would argue that if a pool started with a 50/50 balance and then the price of one asset doubled and then went back to where it started, and no money was taken out or put into that pool along the way other than by the balancer, and then the entire pool cashed out exactly where they entered, in that scenario, the pool facilitator (Uniswap, Cubdefi, etc.) would actually suffer a loss. That loss would be the transaction fees it incurred to rebalance the pool along the way in both directions.
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Right, but my understanding is there is an automatic balancer.
This 'automatic balancer' you speak of is just the ratio of x to y coins in the pool.
There is no balancer; the price is always right were it should be: at x to y.
The price of a coin in an AMM pool is always x:y where x is one coin and y is another.
The problem you're having with this concept is that it's being explained to you as if Centralized exchanges are the standard and Uniswap is this weird thing that doesn't make sense. It's being explained as though the price on the centralized exchange is correct and it's the AMM that needs to be balanced.
This is patently absurd and self-centered on the part of the centralized exchanges. The price on UNISWAP is the correct price, and it is actually the centralized exchanges that are wrong. Why? Because the liquidity on a AMM is ALWAYS going to be higher than a centralized exchange by orders of magnitude. There is only one price: the current ratio. And every single coin in the pool is being sold at that price when combined with the slippage algorithm. UNI-SWAP. One swap; one pool. No order book.
This will become more and more obvious as AMM takes over as the superior solution to liquidity issues.
Ok. I guess we have different definitions somehow. You say this:
The problem you're having with this concept is that it's being explained to you as if Centralized exchanges are the standard and Uniswap is this weird thing that doesn't make sense. It's being explained as though the price on the centralized exchange is correct and it's the AMM that needs to be balanced.
This is patently absurd and self-centered on the part of the centralized exchanges. The price on UNISWAP is the correct price, and it is actually the centralized exchanges that are wrong.
And I read this about what Balancer (BAL) does:
Pools are efficiently rebalanced through a multi-dimensional invariant function used to continuously define swap prices between any two tokens in a pool. Essentially, it is an n-dimensional generalization of Uniswap's x * y = k formula.
Whenever market prices are different from those offered by a Balancer Pool, arbitrageurs will make the most profit by trading with that pool until its prices equal those on the external market. When this happens, it cancels out the arbitrage opportunity. These arbitrage opportunities guarantee that, in a rational market, prices offered by any Balancer Pool are identical to the rest of the market.
Like I said, my understanding is that when the pools become unbalanced due to price fluctuations, AMM's will rebalance them by buying and/or selling the assets represented in those pools to even them out again. There is a "formula" they use that creates the "impermanent loss" that will only become permanent if the staker leaves the pool.
Logically, it makes sense. If the price of ETH is 20% higher on Coinbase than it is in my LP, I'd leave the pool and go sell my ETH on Coinbase. But that's not possible because the pool will rebalance itself by selling some ETH and converting it into the other asset so the value of both sides is the same. I'll lose some ETH while gaining some of the other asset. The overall value of the pool will go up but it won't increase by as much as it would have had the 2 assets been held outside the wallet. Impermanent loss.
I guess I would just say that the centralized market prices are NOT wrong. They reflect the buying vs selling pressure IN THEIR PARTICULAR MARKET. If their prices get out of whack with other markets, arbitrageurs will come in and correct it. If I can buy BTC for $54k on Coinbase and sell it for $55k on Kraken I'll short Kraken and long Coinbase in equal amounts until the prices get close enough its not worth the risk.
No market is WRONG. It's simply a reflection of what someone is willing to pay for something and what price someone is willing to sell for.
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Impermanent loss is the difference between what you get when liquidating your pool stake vs what you would have had if you'd just kept the two assets outside the pool.
This is also problematic because this is not a thing that actually happens in the real world. No one just sits on half of their stake being a stable coin: they trade it, and on average traders lose by a big margin.
Again impermanent loss only happens because you have LP tokens in the pool, which means your coins are for sale. Say the value of CUB goes from $5 to $10. The CUB that you personally have in the pool is going to be sold at $5, $6, $7, $8, $9, $10, and every value in between on the way.
So basically what you are saying is this: Well if you had just held the CUB and waited for it to spike to $10 you would have saved money! YEAH! NO SHIT! The entire concept of impermanent loss is flawed to the core and makes ridiculous assumptions like average people could have traded the market better than just farming the pools. Like, no... they can not... it is proven.
Again, arbitragers can not sap the LP pool.
I'm telling you this for a 100% fact.
No money flows from the LPs to the arbitragers.
Zero dollars.
Fact.
The only reason "impermanent loss" happens (terrible descriptor) is because your coins are for sale on an algorithmic curve and you are betting AGAINST the traders. LP holders are the house in the casino, and traders are the gamblers... so when people are like: "Well in this perfect scenario the gamblers beat the house on this occasion..." You can understand how that is an infuriating mindset that completely ignores the reality of the situation.
Again, arbitragers have nothing to do with any of this.
Impermanent loss happens with or without centralized exchange listings.
Outside exchanges affect impermanent loss 0%.