Links
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USDC LP Market Neutral Vault (nUSDC)

https://neutra.finance/vault/usdc

LP Farming & Impermanent Loss

If you have ever provided liquidity to any DEX that uses an Constant Product Market Maker(CPMM) model, you would have noticed that you sometimes end up holding less money than you had initially started out with. This is what we well know as impermanent loss(IL), which is "the temporary difference between the value of your LP position and the value of your original position". Once you remove liquidity, this loss becomes permanent.
IL occurs as a result of a change in the price of a token relative to its pair within the LP pool due to traders swapping against the pool. Such differences occur because the algorithm is programmed to automatically adjust their exchange rates to maintain a consistent ratio of supply, typically at 50:50.
There are two important points worth noting about impermanent loss:
  1. 1.
    Impermanent loss always occurs whenever there is a price change, regardless of the direction of the price movement.
  2. 2.
    Impermanent loss increases exponentially the larger the price change.
Our automated vault frees you of these concerns by letting you earn the auto-compounding APR of top-performing pool while minimizing your exposure to impermanent loss.

Mechanics

To hedge against the volatility of ETH, two actions are taken
  1. 1.
    Borrow ETH from AAVE and deposit to Camelot ETH-USDC LP pool to create a market-neutral exposure to ETH price.
  2. 2.
    Rebalance position to prevent accumulating impermanent loss.
Infographic of the CPMM Strategy

Rebalancing

Rebalancing is triggered by 1)Liquidation Risk and 2)Price movements to serve the purpose of minimizing impermanent loss and preventing liquidation.
When the Debt Ratio (ratio of assets borrowed vs assets in LP position) goes beyond a certain threshold, the vault closes and opens new LP and debt positions to reset net market exposure to zero. Then, the position is protected against further price movements and exponentially increasing IL.

Backtesting Results

Strategy Configurations

Test Sample
07/12/2023 - 21/04/2023
Sample Data
  • Minute-resolution reverses data for Camelot
  • Hour-resolution AAVE interest rates
  • Hour-resolution Camelot Rewards
Initial Investment
$1,000.000
Strategy
Debt Threshold (=/-)
Collateral Ratio
Perf Fee
Mgmt Fee
A
1.5%
75%
20%
1%
B
2%
75%
20%
1%
C
3%
75%
20%
1%
D
4%
75%
20%
1%
E
5%
75%
20%
1%

Considerations

  • There is no collateral rebalance trigger, relies on debt rebalances (realistic in practice)
  • Strategies are harvested daily
  • Harvests and Rebalances are considered to cost a fixed cost of $5 per transaction. This may not be realistic in high-fee environments
  • Rebalances and harvests don't consider slippage and trading fees.
  • The tests do not account for liquidity dilution
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For more details, check out our Medium article!