Does Zircon’s Impermanent Loss Mitigation Work?
Yes. But you should know when and why.
A few weeks passed since announcing our launch. In that time we went from $30,000 to $750,000 in Total Value Locked, so thank you to all our users!
Our token ZRG also went up from $0.000894 to a maximum of $0.005 — a gain of 5.6x. This is important because we can see if Zircon’s impermanent loss mitigation works!
Pylon LPs suffered between -0.8% and 21.9% impermanent loss, instead of the 27% they’d have seen normally.
Want to know how some LPs had negative losses? Read on 👇
⚖️ How to measure ZRG impermanent loss
We benchmarked the ZRG/MOVR, ZRG/ETH and ZRG/USDC pools from October 4 to October 17.
To calculate the impermanent loss we sampled transactions to see the ratio of Float pool tokens created per ZRG supplied. More pool tokens = more impermanent loss.
We compared these numbers to a regular LP position with ZRG/USDC. We ignored the fact that the other pools were paired with MOVR or ETH as their effect on ZRG impermanent loss were negligible.
️⛳️ The results
ZRG/MOVR was the best performing pool out of the bunch.
ZRG Float holders ended up having negative impermanent loss over the whole period: this means they have more ZRG than they started with.
The graph shows the daily impermanent loss of ZRG Float compared to the standard impermanent loss you’d have on other exchanges. The two lines are fairly close together, right until the final pump, where they diverge massively.
Why? A lot of MOVR liquidity was added at this time, which made ZRG Float have Negative divergence. This meant that it had “negative” impermanent loss when going up in price, reducing the total impermanent loss to less than 0.
Rebalancing the pool with MOVR also involves adding ZRG through the Add & Swap method. Impermanent loss was negative because this extra ZRG was gradually “unlocked” for Float as ZRG went up.
The pairing with ETH was less lucky. It started the period with a consistently high divergence, meaning that it immediately suffered large impermanent loss.
After a few days the ETH side was rebalanced, and ZRG/ETH still ended up beating regular impermanent loss despite its awful start. This shows the importance of joining pools when they are balanced. High divergence increases your immediate losses, so you should avoid these vaults.
The USDC vault was also a high performer, reducing impermanent loss to just 3%. Like ZRG/ETH, it was somewhat imbalanced at first, but made up for all the losses in the second phase of the rally.
💯 Why does Zircon work?
We’ve explained more about the system in our Knowledge base. In a nutshell, we incentivize liquidity providers to supply the extra tokens that were “stolen” by impermanent loss.
In this way, the total impermanent loss never gets to compound to huge percentages, eliminating IL anxiety. The Float share has this name for a good reason though, as depending on the state of the pool its IL may change drastically at any given moment.
Still, the system is designed to effectively balance itself in the long term.