Follow-up on IL Mitigation event

Dear SILians,

There was a huge fluctuation in the SIL/BUSD farm on the BSC at 04:40 PM UTC on October 29th. We found that the root cause was the asynchronous clearance settlement(Impermanent Loss Mitigation) triggered by a huge withdrawal transaction that sold a large number of SIL tokens to the market.The mitigation action also led to a sharp drop in the price of SIL tokens.

In response to the questions raised by the SIL LP mitigation action, the following answers and explanations are provided by the team:

1, About Impermanent Loss Mitigation
The SIL’s YIELD mode is built on top of LP. Based on the LP formula, if either User A or User B has borne impermanent loss, the platform will sell the counterparty’s profit(in token numbers) (User A is equivalent to User B’s counterparty’s. (Or vice versa)) to compensate the party that has borne the impermanent loss.

Users who enter the liquidity mining farm will share the impermanent loss equally. When the impermanent loss needs to be compensated, the entire farm will perform an impermanent loss mitigation operation(swap operation). In this event, due to the unilateral decline in the price of SIL tokens in the SIL/BUSD liquid mining farm for a quite long period of time, the accumulated impermanent loss was quite large, and due to the large amount of SIL tokens sold in a single transaction, the transaction slippage also was extra large. In this case, some users who deposit BUSD find themselves to have less BUSD. The reason for the issue is that the accumulated IL mitigation funds of this farm cannot cover the impermanent losses of the user.

2, Regarding the increase in SIL’s amount of users who staked SIL:
When SIL’s smart contract needs to execute IL mitigation instructions, it will firstly execute an IL calculation instruction in order to calculate the IL degree of both parties based on current market price of SIL/BUSD, then the smart contract will execute impermanent loss mitigation operation(swap instruction) which is to sell SIL tokens for BUSD tokens in order to mitigate the BUSD party. These two instructions are separate and standalone, the first calculation instruction happens before the second swap instruction, so the first calculation instruction is not aware of the price fluctuation caused by the second swap instruction(To be precise, we should do recursive tail call of all possible calculation/swap instructions until there are no more swap instructions needed, since the IL can propagate in hyperbolic form, like below

but we can only do one time of this calculation/swap loop, or the gas fee will be skyhigh).

In the day to day case, the withdrawal amount won’t be very large so the IL mitigation swap instruction won’t be that large too, and it won’t change market price much. But in this event’s case, the withdrawal amount is extra large, which causes extra large swap instruction to be executed after extra large LP decomposition, which almost dominate the market price since Pancake’s SIL/BUSD pool’s liquidity is almost solely contributed by SIL’s SIL/BUSD farm and almost 70% of the liquidity was removed due to the extra large withdrawal.

As you may aware, based on AMM’s x * y = k formula, when the price of SIL drops, the number of SIL in the SIL/BUSD liquid mining pool will increase, and the number of BUSD will decrease, so the swap instruction of IL mitigation causes SIL stakers to have more SILs. And also because the swap instruction is executed after IL calculation, the final outcome is not re-IL-mitigated so it’s basically final. This is why SIL stakers in SIL/BUSD farms have more SILs than before. There is still room to improve this algorithm, it shall be revisited.

3, Will there be clearing/settlement risks in other mining farms?
As the Pancake’s SIL/BUSD pool’s liquidity is almost solely contributed by SIL’s SIL/BUSD farm, the SIL clearing/settlement naturally have more impact then other farms where SIL’s farm usually can’t dominate the liquidity. However, we recommend that users understand the principle of impermanent loss before ape-into farming, and fully understand the product model of the SIL product, and fully understand the relevant tokens of the farms before staking, in order to avoid unnecessary losses.

4, I deposited BUSD in SIL/BUSD and now I have less BUSD. Is there any compensation plan?

For users who suffered losses in this passive clearing/settlement event, the team will take certain measures to help recover users’ losses. If you have suffered an impermanent loss during this clearing/settlement event, please contact CM @esther537 to report your loss. The team will verify the data and take notes of the impact. Within 7 days after you reported the loss, the team will reach out and double-confirm the situation with you. The team will try to help you according to the impact facts and will give out the team’s share in order to subsidize the users in trenches. Thank you for your support to SIL.Finance!

SIL products usually had good farming ROI in it’s creative nature of LP composition. The SIL team has always been committed to provide users with easy to use products with less to lose and more to earn. However, due to the long unilateral trend of SIL’s price, and the SIL farm itself accounted for The vast majority of the liquidity of the SIL pool on Pancake, the passive clearing/settlement event caused SILians to have unintended loss.

In order to avoid the occurrence of similar problems in the future and to reduce the impermanent loss related risk of LP farming, we will try to bring the following updates to BSC:

In order to avoid the occurrence of similar problems in the future and to reduce the impermanent loss related risk of LP farming, we will try to bring the following updates to BSC:

• The BSC impermanent loss compensation model will be switched to the “dual currency compensation” model, and users can choose the impermanent compensation mode to reduce the loss’ impact(refer to SIL OEC V2 mode). We will provide BSC users with binary options to acquire compensation on IL. Different options will result in different redemption tokens. One is the Novel model and the other is the Doctrine model. The Novel model will allocate IL compensation to users in the form of counterparty tokens instead of staked tokens, while The Doctrine model will provide IL compensation to users in the form of staked tokens.
• The “Lounge” product module will be evaluated on BSC, and single currency compound interest will be evaluated too in order to increase user’s ROI.

The road of innovative product development is full of thorns. We thank all SILians for their continuous company and support. We will always be on our SILians’ side and will do our best to protect the interests of SILians.

The SIL Bootstrap team