Impermanent Loss Risk Analysis

\n Create a risk analysis for impermanent loss while participating in the ATOM / OSMO pool versus just holding OSMO. Should users be eager to enter a liquidity position into this pool? 

What is Imperminent Loss?

From a practical perspective, an impermanent loss is a net difference between the value of two cryptocurrency assets in Liquiditypool-based automated market maker. It can happen by simply holding the assets in a wallet. this diffrence gets larger bace on how the price ratio of the two tokens entered into the pool change.

The value loss to IL

Methodology

We will look at how the ATOM/OSMO pool compaired to holding OSMO since July of 2021 and see how the liquidity position performed.

Observations

Since the release of the OSMO token the price of the ATOM token has apriciated better than the OSMO token this means that it has been better to hold 50% osmo mand 50% ATOM than all OSMO at any point. If a user were to have held OSMO/ATOM as liqudity for the past yeah they would currenly have 25% more than if they were to hold the tokens themselvs and would have only lost money on providing liquidity if the liquidty was taken out of the position in the first month of the year.

#Conclusion

Overall it seems like the OSMO-ATOM liquidity pool on Osmosis has out performed the OSMO token in the past year and seems like it will continue outperforming under most circumstances. In the past year the big reasons that the OSMO-ATOM pool out performed the OSMO token in the past year ATOM out performed OSMO, impermanent loss was never greater than 5.5% and the APY of the pool has stayed north of 30% for most of the year. There are two circumstances that could occur to make the OSMO token outperform the pool. The first way would be if the OSMO token dramatically increased in price while the ATOM token did not, this would increase impairment loss on the position and opportunity cost for holding ATOM rather than OSMO. The second would be if ATOM lost a lot of value while OSMO did not, in this case impairment loss on the position would increase an opportunity cost for holding ATOM rather than OSMO. Both of these situations seem unlikely because the price of the ATOM and OSMO token seem to have price correlation and will most likely fall or succeed together at this point. 

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