While being investigating the defi crypto space I've noticed most of yield farming projects aims to offer same thing, token rewards based on your liquidity providing and those significant APY rewards , so as more you add more you get buuuut, there is an important task not everybody does, calculate its IL (impermanent loss), I think these is so relevant while doing compounding but not seeing where the price/mcap goes. I mean obviously there are many factors affect indirectly or directly on price for example inflation or if we're talking about a deflationary or an inflationary token.
Let's see an example, today I have a 1000$ worth and I like enter in a new project with a inflationary token. I swap my 500$ worth in governance token and the others 500$ in an stablecoin. Imagine today price token is around 1$ , a 2 million supply and 2 million mcap (mcap/supply= token price), but still inflation and burn contract mechanism doesn't balance in same way. So everyday they burn let's say 100k tokens , in other words 700 k tokens in a week, or 2.8 millions of tokens. Today mcap still on same place but actually my LP tokens haven't same value like before, let's how price decreases
mcap 2 million / 2 million supply + 2.8 million supply by inflation = 0.40 $.
As you can see there was a huge 60% drop while you were farming, yeah maybe you got like an estimate 1000% average apy during first two weeks (83% monthly) since launch but the fact is, you supposed to be in gains because these period you got so many rewards but let's take a look where we are now , after being in a 1000% apy you've got like approximately 200 tokens per week , so we farmed 400 tokens in two weeks, quite a lot but remember now we are at 0.41 so actually we are close same place and that is because the ratio of assets changes :
previously when token price was 1$ we got 500 governance token and 500 busd that was 500 GT / 500$
now we are at 0.40 $ price so our Lps tokens have decreased around 36% because IL,
500 * 1.6(60% drop)=800 GT / 320$ BUSD
LPS VALUE 640$
REWARDS 400 GT*0,40 $ = 160$
So even with such high rewards after two weeks we are even worse than just holding. As I say you must be just at the right time and place to "maybe" get some benefits in a Defi Yield Farming project.
WHAT WILL YOU DO? FARMING OR JUST HOLDING? LET ME KNOW ;)
