Is Impermanent Loss Really a Loss?
When you supply liquidity to a liquidity pool and the price of your deposited assets changes from when you deposited them, you suffer an impermanent loss. The greater the change, the more vulnerable you are to temporary loss. In this situation, the loss translates to a lower dollar value at the time of withdrawal than it did at the time of deposit.
Pools with assets that stay within a small price range will be less vulnerable to temporary losses. For example, stablecoins or different wrapped versions of a coin will stay within a rather narrow price range. Liquidity providers face a lower risk of temporary loss in this scenario (LPs).
What Is Impermanent Loss?
Impermanent loss occurs when the total worth of all cryptocurrency holdings deposited by a liquidity provider into a pool starts to differ from the total worth when first deposited.
It’s called impermanent loss because the losses only become realized once you withdraw your coins from the liquidity pool. At that point, however, the losses very much become permanent.
A liquidity pool receives two coins from you. You’re allowing traders to exchange back and forth using your two tokens by giving them your coins. As a result, these traders pay you fees… In fact, there are frequently a lot of other investors with you, and everyone splits the fees equitably based on their share of the funds contributed.
Impermanent loss is the temporary loss of value you experience when the 2 tokens you invested in change in value relative to each other. Put simply, if one goes up and one goes down… you will have IL. If one goes up and the other stays the same, you will have IL. And if one goes down and the other stays the same, you will have IL.
If you want to make more profit, you want them to stay around the same price or both of them to move up.
So many people misunderstand impermanent loss.
It isn’t something to be scared of, it’s something to take advantage of. I think the word “loss” scares people.
If the APR you’re receiving outweighs the expected loss (based on your outlook), then it’s a net positive. Simple.
You can also strategically “break” LPs to maximize profits. For example, if you’re farming MATIC-USDC, you can create an LP when $MATIC prices are high, and break the LP when $MATIC prices are low. This way you’re essentially stacking more MATIC tokens whilst earning yield.
With my LPs, though, I normally adopt a more passive approach. My formula for justifying joining a pool is simple: APR must be more than the expected “loss” + single stake APR. My frens, it’s all about the investment return.
Are you still Scared? Let me walk you through a few more steps on how to avoid impermanent loss.
- Provide to stablecoin pairs
Stablecoins are supposedly immune to impermanent loss because their price does not move. As a result, many other investors have already maxed out these pools, resulting in extremely low payouts. It’s worth noting that putting money into two stablecoins is probably the safest option to provide liquidity.
2. Provide when a coin price is low
You can try to supply liquidity during a bear market if you only want to make sure your impermanent loss isn’t affected by the coin’s drop. This way, you’ll earn rewards for providing liquidity while simultaneously benefiting from the price appreciation of the coins you’re supplying. Even if you are going to experience impermanent loss, you would prefer to do so when your total value is increasing rather than decreasing.
3. Avoid risky or volatile coins
When it comes to risk, the third tip is to stay away from volatile or risky coins. When a coin is volatile, the possibility of impermanent loss increases. The impermanent loss is limited because stablecoins rarely change price, but the opposite is also true. When a coin quickly changes its price up or down, you will also experience quite a bit of impermanent loss. Many newly issued coins are quite volatile, as are tokens with minimal liquidity. New and low liquidity tokens fall into the same category, and they appear to be riskier. Tip #3 is to stay away from these coins since, while they come with a huge payoff, they also come with a big danger.
4. Move with Caution
Start with little sums if you don’t understand how the market operates or how impermanent loss can impact your plans. Liquidity mining should be approached with the same caution as any other cryptocurrency trading method. It all comes down to being thorough in your research.
If you decide to become an LP provider, Quickswap and a few other Dex’s provide lucrative APY pools.
QuickSwap is a fork of Uniswap developed by Nick Mudge and Sameep Singhania on the Polygon blockchain platform. QuickSwap is a permission-less decentralized exchange (DEX) based on Ethereum but powered by Polygon’s Layer 2 scalability infrastructure.
QuickSwap has all of the popular features of top DEXs, but it also has the missing key components for a completely smooth user experience. Some important features of QuickSwap include:
- Community Governance
- Liquidity Mining
- Yield Farming
- Dual Farming
- Layer 2 Transactions
- Non-custodial trading
For More Infomation: