BNB Value - Explained

Explaining why the protocol works on BNB value, not on USD value.

Summary

With our leveraged yield farming protocol working solely on BNB value, it is understandable that at times, with market movements and impermanent loss, it might become a bit confusing as to how the debt ratio is calculated because our first instincts are to consider the USD value on top of anything else.

Therefore, let's discuss in an easy-to-understand manner how the protocol works and look into examples of when the BNB value of one's position changes.

Why is the protocol using BNB value instead of USD value?

The answer to this question is simple. Because our bank is BNB based, not stable-coin based.

That means that once the borrower wants to open or close his/her position, they'll borrow/pay back the lender in BNB, not BUSD, USDT, or any other coin/token.

When does the BNB value of my position change?

The BNB value of your position changes when the tokens within your liquidity can buy a different amount of BNB than previously. The USD value of the position has no impact.

Let's look at some examples to understand the situation better.

We'll use the BNB/CAKE pair as a primary example, due to its popularity. The same logic applies to any other pool.

What if BNB went up 20%, while CAKE went down 20%?

Starting prices of the example:

  • BNB = $500 USD

  • CAKE = $20 USD (0.04 BNB)

  • Investment = $1,000 USD (2 BNB)

With an investment of $1,000 USD, the starting liquidity will be 1 BNB + 25 CAKE and the position value will be 2 BNB.

Now, the market is volatile and the prices change, BNB going up 20% while CAKE going down 20%.

What would our position look like?

New prices:

  • BNB = $600 USD

  • CAKE = $16 USD (0.0266...67 BNB)

  • Impermanent loss = 2.02%

Now, our position would look like this: 0.82 BNB + 30.62 CAKE.

Converting the CAKE within the pair to BNB would get us roughly 0.8165 BNB, which combined with the remaining BNB in the pair would get us to a total of 1.6365 BNB, which is now our position's BNB value.

While our position went down -18.17% in BNB value, the USD value only changed as much as the impermanent loss. But because you borrowed BNB, you have to give BNB back to the lender, which means you're getting closer to liquidation levels.

What if BNB went down 20%, while CAKE went up 20%?

Starting prices of the example:

  • BNB = $500 USD

  • CAKE = $20 USD (0.04 BNB)

  • Investment = $1,000 USD (2 BNB)

With an investment of $1,000 USD, the starting liquidity will be 1 BNB + 25 CAKE and the position value will be 2 BNB.

Now, the market is volatile and the prices change, BNB going down 20% while CAKE going up 20%.

What would our position look like?

New prices:

  • BNB = $400 USD

  • CAKE = $24 USD (0.06 BNB)

  • Impermanent loss = 2.02%

Now, our position would look like this: 1.22 BNB + 20.41 CAKE.

Converting the CAKE within the pair to BNB would get us roughly 1.2246 BNB, which combined with the remaining BNB in the pair would get us to a total of 2.4446 BNB, which is now our position's BNB value.

While our position went up 22.22% in BNB value, the USD value only changed as much as the impermanent loss. But because you borrowed BNB, you have to give BNB back to the lender, which means you're getting further away from liquidation levels.

What would happen in any possible case, in short?

Short version, here we go:

The BNB value of the position goes down 🠋 when:

  • BNB goes up & CAKE goes down

  • BNB stays the same & CAKE goes down

  • BNB goes up & CAKE stays the same

The BNB value of the position goes up 🠉 when:

  • BNB goes down & CAKE goes up

  • BNB stays the same & CAKE goes up

  • BNB goes down & CAKE stays the same

The BNB value of the position doesn't change when:

  • BNB goes down & CAKE goes down

  • BNB goes up & CAKE goes up

  • BNB stays the same & CAKE stays the same

Do not forget about the USD value of your position.

It is easy to forget about the USD value of your position in an environment where everything is calculated based on the BNB value.

Remember the instances in which both tokens of the pair go up, the BNB value will stay the same but the USD value will increase.

When do I make a profit?

You can make a profit in multiple instances, such as:

  • When both tokens of the pair go up

  • When both tokens of the pair stay the same since you're yield farming rewards on other platforms via Kalmar

  • When tokens move in price, but the farming rewards outweigh the loss from the market movement

Additional information

If you still have any questions or issues, feel free to reach the Kalmar team in the telegram group.