Pylon in Bull markets
We’ll use an ETH/USDC pool for our example. Let’s say we have two liquidity providers, Alice and Bob. Alice is super bullish on crypto, while Bob only wants to sit in stablecoins.
For simplicity we’ll say that the price of ETH is $1,000 at the start. Alice commits 10 ETH to the Pylon Float vault, while Bob sends $10,000 USDC to the Pylon Stable vault. Pylon matches their tokens together, and sends them as a single deposit to the AMM pool.
Traders swap against the pool and pay fees to both Float and Stable. Now let’s imagine that we’re one year later and ETH has gone up to $4,000. Both Alice and Bob want to withdraw.
Since the AMM pool will automatically rebalance its tokens when ETH goes up in price, Alice and Bob’s tokens were rebalanced too: there’s now 5 ETH and $20,000 in the pool.
Zircon Pylon knows that Bob originally supplied $10,000, but there’s now $20,000 in the pool. Bob clearly didn’t expect to make money because ETH went up in price, so Pylon only assigns him his original $10,000 (plus his fees, but we don’t care about them in this example).
So that 10,000 USDC excess is given to Alice, which means that her share is worth 7.5 ETH (or $30,000). The 2.5 ETH missing from her original 10 ETH are due to impermanent loss, which we’ll deal with later.
Alice can now withdraw her share in a few different ways. If she’s only a small part of the entire pool, she can get her share as the full 7.5 ETH. If not, she can receive the equivalent in the 2 tokens inside the pool, which are always split 50/50. In this case that’s 3.75 ETH plus 15,000 USDC.