Price Settlement
Add Leverage for Better Capital Utilization
Impermanent Gain is the flagship of the iGain Universe. Options are targetting at the IL of certain token pairs. The settled price of Long and Short tokens will be determined by the IL degree at the expiration date.
The huger the degree of the IL is, the higher the settled price of the Long token. Through holding a corresponding amount of the Long tokens may perfectly offset the impermanent loss of the entire position. The real-time price of the Long tokens before expiration is determined by the market forces.
Each option lasts a month. To determine the settled prices of Long/Short tokens, we might find some clues in the historical data.
We extract the ETH/DAI price data from 2020/1/1 to 2020/12/21, and we present the impermanent loss data of providing liquidity for a month at each time.
From the above chart, we can find out that the impermanent loss of serving as the liquidity provider for a month is within 0 to -10% at all times. There is no such case that IL is above -10%. Most of time, It was between 0 to -5%. Therefore, we can add 20x leverage to Impermanent Gain, narrowing the IL range from (-100%, 0) to (-5%, 0), effectively increasing capital utilization.
The correlation between the settled price of Long/Short tokens and the IL is shown below:
If IL is 0% after a month, then the price of 1 Long will be settled at 0 DAI; the price of 1 Short will be settled at 1 DAI.
If IL is 10% after a month, then the price of 1 Long will be settled at 1 DAI; 1 Short will be settled at 0 DAI.
We can also express it in the mathematic formula:
$1\ Long=\left\{\begin{matrix} 20\times |IL| \ DAI& ,0\leq|IL|\leq0.05 \\ 1 \ DAI& ,|IL|\geq0.05\ \ \ \ \ \ \ \end{matrix}\right., \ \ Short = 1-Long$
The setting of the leverage ratio varies with the pair and the duration. The greater the price volatility and the longer the duration, the lower the leverage ratio, and vice versa.
We will determine a reasonable leverage ratio based on historical prices backtesting.
*Price feeds will be pulled from Chainlink Oracle