LP token pricing

Pricing of LP tokens

There are multiple methods to price LP tokens. Balancer, for example supports oracles for its LP tokens. Since Aura uses Balancer, there is no need for additional pricing.

For protocols such as Curve, and consequently Convex, pricing is defined based on the equilibrium between assets, the amount of assets in a pool, and the price of individual assets. Overall, two components are needed:

1) Composition of the pool (underlying assets and quantity) 2) Price of the underlying assets

When these two components are combined, it leads to the price estimation of the individual LP token.

Impermanent Loss (IL) mitigation

Impermanent loss is the potential loss a liquidity provider faces in a decentralized exchange when the price of the supplied assets changes compared to when they were initially deposited. For instance, in the case two assets, A and B. If A depreciates or appreciates by 50% and B stays constant. The impermanent loss on the A-B LP would be 5.7%. Generally, the price of LP tokens behaves asymptotically to the basket of the underlying assets, minus the impermanent loss.

Nonetheless, the LP token itself possesses additional risks such as unmarked changes of the underlying liquidity (especially with liquidity pools using volatile tokens). This is mitigated as the protocol is able to price the LP based on the target composition of the pool and the price of the individual tokens.

This means that the protocol is able to calculate, with a high level of confidence, the total value of assets, which should be available for liquidation after withdrawal of a given LP token.