1/14 Who would like to understand the un-peg mechanism in a Liquidity Pool? Here is my 1st 🧵inspired by @DeFi_naly and @ChadMcchief techniques, thanks Bros. Example on $stETH / $ETH pool on #Curve:
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2/14 First of all, in #DEFI, token swap occurs in Liquidity Pool. The largest dex being @CurveFinance. If you want to be kept up to date on #curve and beyond, just follow this brilliant guy:
3/14 Token price in a LP follows a specific swap curve. @uniswap folows X*Y=K, but others like @CurveFinance or @VelodromeFi has specific swap curve for correlated assets
4/14 Peg, i.e token average price over all DEXes/CEXes, is maintained as long as the ratio of the tokens inside the pool are balanced, such as the $sUSD / $3CRV pool from @synthetix_io
5/14 however, above a specific threshold, peg is not anymore maintained, this is the perfect example of the @LidoFinance pool stETH/ETH.
6/14 And this value depends on a specific A factor as explained by Mr Whale @Tetranode, just read and enjoy :
7/14 This A factor is easily seen on #curve pool
8/14 By changing "A" factor on this website desmos.com, you can simulate the price impact in case of imbalanced token ratio. If ratio is 50/50 peg is perfect.
9/14 Let's check $stETH / $ETH pool and play with it. A factor is 50, so with a pool balance 75/25, unpeg is 3% already, however pool is already significantly drained.
10/14 Whag would have happened with A factor of 10 at same imbalance ratio 75/25: depeg of stETH would have been close to 14%, so much much worse !
11/14 However with A factor of 10, depeg of 3% happens only when balance is 48/52. So leaving plenty of liquidity for arbitrage to maintain the peg.
12/14 as said by @Tetranode and Thanks for his insight, by trying to optimize swap efficiency, token peg becomes more fragile.
13/14 So before entering a LP, check the TVL, the A Factor, and define at which ratio a depeg event might tell you to watch out.
By the way if anybody knows a tool that can track this token ratio and sending notifications off chain, i'd be grateful.
By the way if anybody knows a tool that can track this token ratio and sending notifications off chain, i'd be grateful.
14/14 i hope i was clear enough, and right in my assumptions. Feel free to engage discussion if not.
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