An Analysis of Popsicle Finance’s Sorbetto Fragola Pools!
One of the main concerns that has been raised by the crypto community has been around the profitability of our Univ3 Optimiser Sorbetto Fragola.
Huge thanks goes to 0xDanger, who has put together this brief article to help us answer the following question:
“Do the fees generated from the Popsicle’s Fragola pools outpace impermanent loss?”
You can also find his tweet thread discussing his analysis here.
Let’s firstly explore how Sorbetto Fragola works.
Sorbetto Fragola is a protocol that leverages Uniswap v3 and functions as an automated range optimiser.
It adjusts tick ranges (lower & upper price bounds) for Univ3 LP positions to concentrate liquidity and maximise trading fees. This being said though, concentrated liquidity can be a double edged sword.
The greater the concentration of liquidity, the greater the magnitude of impermanent loss when price of the underlying assets in the liquidity position move when compared to a 50/50 LP position (which uses a constant product formula).
Impermanent loss (or IL) becomes permanent or realised when one of the following things happens:
1. Position moves outside of the range initially set by the liquidity provider
2. User removes their liquidity from the Univ3 position, making the impermanent loss, permanent
In Sorbetto Fragola’s case, impermanent loss is realised when a rerange occurs.
A rerange consists of the following steps:
- Liquidity is removed from the pool
- Tick ranges are readjusted
- A swap transaction is initiated to get assets into a ratio that matches the new tick range.
So back to the question “Do the fees generated from the Popsicle’s Fragola pools outpace impermanent loss?”
To answer this question, 0xDanger collected the following data for 15 volatile asset pools on Ethereum Mainnet.
The data includes the following:
1. Fees Generated from Pools
2. Profit/Loss from Re-ranges
The figures were then converted into an equivalent USD value as at today.
A cumulative net returns figure was calculated as follows:
Cumulative Net Returns = Cumulative Fees Generated from Pools + Cumulative Profit/Loss from Re-ranges
This calculation is important as it allows to adjust our fee revenue for any realised IL.
Let’s now look at a summary of the high level results.
As you can see from the image:
Out of the pools analysed, 13/15 were in profit as in:
Cumulative Fees Generated > Cumulative Profit/Loss from Reranges.
Now let’s interpret the chart shared in the opening tweet with a focus on the profitable pools.
Remember all calculations use the USD equivalent at today’s prices.
The chart consists of 3 coloured lines:
- Cumulative Fee Revenue (Green Line) — This is the total accumulated sum of all fees earned from this liquidity pool minus fragola performance fees.
If this line is above 0, this means fees generated were positive and vice versa.
- Cumulative Profit & Loss From Reranges (Red Line) — the total accumulated profit or loss that resulted when a re-range was triggered.
Remember that re-ranges occur to ensure that the assets remain in an optimal price range to earn trading fees and they lead to assets being swapped (similar to a swap you would complete to buy an asset on an AMM). This then results in IL being realised. Note IL can yield either a profit or a loss. If this value is above zero it means the re-range has yielded a profit and vice versa.
But one of the questions you may ask is:
“How can you profit from a realised Impermanent Loss?”
As mentioned previously, we are using today’s prices to calculate the returns in terms of USD.
As the realised IL was calculated initially in each underlying cryptocurrency, a previous loss that was calculated may actually be a profit if the underperforming crypto pair gained in value in USD terms as at today vs the outperforming crypto crypto pair.
- Cumulative Net Returns (Blue Line) — The sum of the Cumulative Fee Revenue and the Cumulative Profit & Loss from Reranges.
As long as this line stays above zero, then the total returns generated from the pool through a combination of fee revenue and re-ranges is positive.
Let’s now have a quick look into some of our most profitable pools.
For example, the USDC/WETH 0.5% & SHIB/WETH 1% has performed extremely well due to the following factors:
1. High Fee Revenues
2. Profits from reranges due to positive IL.
USDC/WETH 0.3% in the meanwhile has performed well due to the fact that the extremely high fee revenue has significantly outstripped any negative IL due to reranges.
Now onto the pools our least profitable pools.
Looking at the charts below the two most unprofitable pools were FTM/WETH 1% and WBTC/WETH 0.3% made total cumulative net losses of -$102,891 and -$336,942 respectively (refer to the table above).
But there is a silver lining!
On December 21, strategy changes were implemented to all pools to create a better balance between reducing negative IL from reranges vs maintaining fee revenue.
This strategy adjustment reflected by the light green line in the attached chart below:
This tells us 2 main things:
1) Cumulative losses from reranges (red line) on both charts are more muted compared to reranges that occurred before December 21.
2) This has resulted in a steep increase of the blue line in both charts towards 0 showing that each pool has been moving back into profitability.
The effect of this strategy change is also evident when viewed across all pools with the magnitude of changes from IL being significantly dampened allowing fee revenue to significantly outpace IL.
And this concludes the first report to check the performances of Fragola Pools. We would like to say a huge thanks to 0xDanger, and we cant wait for more reports on how Fragola is performing!