Under the Hood: Liquidity Pool APR (Synth Leverage) 101

Since the Synths Cap was raised to >50% to accommodate Savers, Liquidity Pool (LP) depositors have noticed that their yield, or Annual Percentage Rate (APR), has sometimes been negative. This is because LP’ing is essentially now leveraged to RUNE:Asset price ratio. If this ratio is decreasing, LP’ers could indeed face negative APR, i.e. losses. Conversely, if the ratio is increasing, LP would likely make more profit than in the past (i.e. before introduction of Savers).

Below are a couple of simplified scenarios, without impermanent loss (IL) or yield from swaps.

Let’s start with a RUNE:BTC pool, where Synths/Savers Utilization is at 50% of the total pool depth. The LPs hold the other 50% of the pool.

Scenario 1 (RUNE:Asset Price Ratio Decreased)

Let’s say RUNE price dropped to $1, while BTC price was unchanged. Before synths, LP would have lost 25% value (from $2m to $1.5m).

The RUNE:Asset price ratio has decreased. Because the pools still need to fully back the Savers’ value, the LPs lost 50% of their value instead (from $2m to $1m)

Scenario 2 (RUNE:Asset Price Ratio Increased)

Conversely, let’s say RUNE price increased to $3 but BTC price was unchanged. Before synths, LP would have gain 25% value (from $2m to $2.5m).

The RUNE:Asset price ratio has increased. However, the assets needed to fully back the Savers’ value remain unchanged, thus the LPs gain 50% of their value instead (from $2m to $3m).

In conclusion, LP’ing on THORChain is now a higher volatility play. If users prefer a lower risk and positive-only APR (excluding slippage), perhaps Savers is the better choice.

That said, for users who are bullish on longterm RUNE future performance, LP would likely outperform when RUNE:Asset price ratio increases.

Feel free to hop into the TC University Discord to chat about this, or any other THORChain questions that you may have.

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