LP Returns on the SUSHI put option pool
Exploring a real case and understanding AMM returns
On October 18th we launched SUSHI:amUSDC put options with a strike price of $8.00, with an expiration date of October 28th. The pool had a TVL cap of approximately $500,000.00 and got filled in less than a day.
Before we dig into the data for this pool to calculate approximate returns, let’s first recap what LPs were exposed to.
An LP of a regular option pool (using a non-smart-collateral type) is exposed to:
- AMM returns (which can be impermanent gain or loss)
- Trading fees
On the SUSHI pool though, the collateral asset was smart collateral from Aave (please note that aTokens from Aave in Polygon are denominated as amTokens).
The amTokens generated yield while they were used as collateral in option tokens. In addition to that, they also received rewards from Polygon’s liquidity mining program with Aave. So, in summary, the LPs of the SUSHI:amUSDC pool were exposed to at least four different sources of return:
- AMM returns (impermanent gain or loss)
- trading fees
- yield from Aave (due to smart collateral)
- rewards from Polygon (MATIC tokens)
LPs were also eligible for an NFT reward from Pods (available for LPs to claim after December 17th). Find out more here. ✨
The total amount of fees collected in this pool was $6,329.17.
The average AMM return was an impermanent gain for all LPs of 0.11% (Figure 1) and 1.33% from fees over the course of 10 days (Figure 2). This gave a total 10-day return of 1.44% for individual LPs, averaged out depending on the time when the LP entered and left the pool.
This gives us a conservative annualized yield of 66.27% without counting the yield from the smart collateral and the MATIC rewards.
We can find the total yield paid on amUSDC as well as the rewards from MATIC over the 10-day period in the data directly from the contracts.
Real LP Case from Polygonscan
Let’s explore the results of this particular LP (let’s call him Degenboi for the sake of simplicity).
Degenboi provided liquidity on the first day of the pool’s lifetime, with $10,000 amUSDC in total. His liquidity was split as follows:
- 9,895 aUSDC (1,235 options)
- 104 aUSDC in the stable pool
On October 28th (during the exercise window), Degenboi removed liquidity from the pool.
- 174 aUSDC as stable (observe that there was a surplus on stablecoins)
- 79 aUSDC as feesA
- 64 aUSDC as feesB
- 482 options (observe there’s a shortage of options as compared to what he initially provided)
On the same day Degenboi unminted the options he removed 482 options to retrieve a part of the collateral he locked initially.
Unmint options:
- Received 3,864 aUSDC (+8 aUSDC interest)
- Received 1.17 Matic (+2$ as Matic liquidity mining)
After the exercise window closed, Degenboi could withdraw the rest of the collateral he locked from the options that were “missing” in the remove liquidity step.
Withdraw the rest of the funds:
- Received 6,049 aUSDC (+25 aUSDC interest)
- Received 1,869 Matic (+$3,42 as Matic Liquidity mining)
Total initial position: 10,000 aUSDC
Total final position: 10,235.50 aUSDC
In summary, Degenboi did $235.50 in profits over a 10-day period, divided on the following yield sources:
- $53 in impermanent gain
- $143 in fees
- $33 in interest from Aave
- $5.50 in MATIC rewards
Final LP profit = 235.50 aUSDC, approximate 131% APY.
Please note that each LP is exposed to the trading fees and impermanent gain or loss that happened while they were providing liquidity and proportionally to their relevance to the pool in that period.
Pool Behavior
Let’s look at the pool dynamics during the life of the option.
The price of SUSHI derived from Chainlink is called each time a user interacts with the AMM. The price of SUSHI did not breach the strike price of $8 outlined in red.
The SUSHI put option expired out-of-the-money (OTM). The premium is marked every time there is a trade. Notice how the premium responds to the time impact and spot price behavior. Interestingly, we did notice one opportunist try to buy puts at the last minute.
The total position of all LPs, starting at 100%, was tracked. During the lifetime of the pool, there was a disproportional impermanent gain as the pool opened and a lot of buy requests started coming into the AMM, but it normalized over time. We ended up with an impermanent gain of 0.11% over the course of two weeks. We look at fees separately to understand better where most of the gains occur.
The decline in total fees shows some LPs removing liquidity and taking their portion of the fees, therefore reducing the total balance of fees in the contracts.
The dynamic fees mechanism took place when a bought 25,000 SUSHI options in two transactions, buying up nearly a third of the total SUSHI options available.
While a couple of LPs left earlier, most of the LPs kept their liquidity until the expiration date, on October 29th.
Some LPs forgot to remove their liquidity. If you are one of them you should see the red warning in the dashboard: “You have funds here!”. Make sure to withdraw your liquidity and collect the fees earned.
We’re creating a tool to calculate each individual LP’s impermanent gain/loss & fee returns in an easier manner so estimating returns will be more precise.
Stay tuned for SUSHI call options, they are coming! 🍣🎉
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