‼️What Is Impermanent Loss?‼️
If you are not completely new on the DeFi scene, you have definitely heard of impermanent loss before, but what exactly is it, how does it happen & can we mitigate it? Let’s take a look!
📌What is Impermanent Loss?
Impermanent loss happens when you provide liquidity to a liquidity pool, and the price of your deposited assets changes compared to when you deposited them. The bigger this change is, the more you are exposed to impermanent loss. Impermanent loss happens no matter which direction the price changes. The only thing impermanent loss cares about is the price ratio relative to the time of deposit.
🚩How does that work? Let’s take a look at an example!
Example:
Let’s say you put 100 ETH and 10,000 USDT into a liquidity pool. Most pools go for a 50/50 ratio when you start your deposit. Let’s say the price of ETH is currently $100. So there’s a total of $10,000 worth of ETH and $10,000 worth of the stablecoin (USDT) that you are depositing into a pool.
Now, let’s imagine that the price of ETH rises to $110. A trader comes in and realizes that he can buy ETH at $100 and sell it to Coinbase for $110. He keeps buying more and more until he stops making money. Basically, this is an arbitrage opportunity for him.
By the time he is done, the liquidity pool has $10,488 and 95.347 ETH. That’s $10488 + $10488 = $20,976. You basically made $976 profit. However, what if you just HODLd?
Well, you would still have your $10,000 USDT, but the ETH you would have had would now be worth $11,000. So, your impermanent loss is: $21,000 ($10,000 + $11,000) — $20976 = $24. Doesn’t seem like a lot, right? But what if price increased 20%? Or fell 50%? Now we are talking!
📉Mitigating Impermanent Loss
What can we do about it though? Well, this is where your exchange comes in!
Impermanent loss can still be counteracted by trading fees. If trading fees are low enough, even pools exposed to impermanent loss can be profitable. But why take the risk at all?
Impermanent loss can only occur in pools where 2 different crypto assets must be deposited. BXH offers users the opportunity to stake only one side of the pool. The other side of each liquidity pool on BXH is made up of the native BXH token.
For example, for all ETH that is provided to the ETH:BXH liquidity pool, the equivalent BXH is added by the system. As a user only has to provide one side of the liquidity pool, there is no risk of impermanent loss! As simple as that!
Ready for impermanent-loss-free trading? Join us! app.bxh.com/
Stay Tuned for BXH News & Updates!🚀
