In every guide or resource I’ve read about liquidity pools (LP), a big warning given to all us noobies is to watch out for impermanent loss (IL). I won’t bother going into the definitions but you can do some reading on LPs and IL
While yes, in the world of Crypto coins are shooting to new heights all the time, I feel that worries over impermanent loss is a bit overblown. Given the high APRs and APYs provided when you lend to LPs, most of the risk of IL is mitigated. Let’s take a look at an example using this impermanent loss calculator:
Let’s say you are staking liquidity in a lower risk randocoin-stablecoin pair
Coin A starts at: $10 and of course coin B is at: $1. Eventually Coin A reaches $50 while Coin B stayed at $1. Plugging these values into the calculator gives us an impermanent loss: 25.46%. While you may be thinking OMG I LOST 25.46% OF MY INVESTMENT, it took Coin A increasing by a whopping 500% before you suffer a loss of 25.46% when you sell your investment. OFC in the crazy world of crypto a 500% gain is just child’s play as well, but when we know the risks we can make more informed decisions.
Another thing to note is that if both coins rise by roughly the same %, the impermanent loss suffered is extremely minimal, so if you stake your liquidity in two coins you expect to grow at the same rate, again, impermanent loss should not be a huge worry.
Hopefully this knowledge has helped to remove a bit of fear when it comes impermanent loss and helps some of you develop strategies going forward! As with all investing, LP staking has it’s inherent risks and isn’t just free passive income. So please DYOR 🙂