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شارك هذا الرابط:

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قائمة مصطلحات متعلقة بالعملات المشفرة، البلوكتشين ومنصة رين.

Impermanent Loss

What is Impermanent Loss?

Since the advent of Bitcoin in 2009, cryptocurrencies have experienced exponential growth. As a result, specific terms are synonymous with cryptocurrency, like blockchain and decentralized finance (DeFi).

DeFi protocols are utilized in numerous cryptocurrencies; they consist of liquidity protocols that enable any user with funds at their disposal to earn trading fees. One of the essential terms in liquidity is impermanent loss.

Generally, a liquidity provider deposits assets of a specific value in a designated liquidity pool. Therefore, the price of the assets deposited is subject to change and may be different than the sum initially deposited. This change is called impermanent loss.

Naturally, the greater the deviation in value, the greater the impermanent loss. In practical terms, the loss is equivalent to less dollar value at the withdrawal time than when it was deposited.

Liquidity pools that accommodate assets with smaller price ranges are less likely to suffer from impermanent loss. Again, stablecoins are a pertinent example; their value does not fluctuate considerably, so they come with a more negligible risk for liquidity providers.

Example of Impermanent Loss

Assume that you want to purchase Cardano (ADA), valued at 0.51 dollars per token. You acquire a hundred tokens, which cost you 51 dollars. You deposit these tokens in a liquidity pool for a certain period before you withdraw the sum.

However, the value of your tokens is lesser at the time of withdrawal than when you deposited them. This is an impermanent loss in effect.

Alternatively, if you invest in a stablecoin like Tether (USDT), your impermanent loss will be lower. This is because stablecoins like Tether are connected to the United States dollar. If the value of a cryptocurrency is linked to another currency, then that token qualifies as a stablecoin. In this case, Tether is connected to USD.

How To Counteract the Impermanent Loss

Impermanent loss may be prevented with trading fees. For instance, the Uniswap (UNI) platform has a transaction fee of 0.3% for each trade disseminated to liquidity providers. In case the trading volume in a pool is high, it may be a profitable endeavor to offer liquidity. This depends on the protocols involved, the particular pool, assets deposited, and general market conditions.

There are other ways to work your way around impermanent loss. However, the best course of action would be to be cautious initially, particularly if you're a novice or unsure about how the market works. Hence, you should invest a smaller amount. Proceeding with caution is strongly advised when you are involved in liquidity mining.

Another way to prevent impermanent loss is to select stablecoin asset pools. For example, if your threshold for risk is not considerable, you can choose a combination of stablecoins like UST-USDC, which will eliminate impermanent loss. Stablecoins are connected to the United States dollar, which means they are not as prone to volatility as other cryptocurrency assets.

Of course, choosing stablecoins is not without a caveat. The lower the risk you take, the lesser your rewards will be. So it would be best if you accepted that you wouldn't earn as much as investors who trade in high-risk pools.

Another alternative for avoiding impermanent loss is to opt for one-sided assets pools. Impermanent loss occurs when rebalancing takes place within exchange liquidity. If investors find one-sided asset pools, they only need a single token. However, the same caveat we mentioned above is applicable: the risk may be lower, but so is the reward attached.

Lastly, investors can go for uneven liquidity pools to offset impermanent losses. For example, specific platforms give users flexible pools that do not warrant a 50:50 token ratio to finalize the price of supported assets. In comparison, most platforms provide an 80:20 or 60:40 balance.

If users select an 80:20 pool, they would not be exposed to a sharp increase in the token worth 80% in this case. However, if the token worth 20% augments considerably, the impermanent loss will be higher. However, the impermanent loss will not come to fruition for a while.

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