Impermanent Losses occur when holding assets in the liquidity pool on DEX (AMM).
For a better understanding, let's first consider what liquidity is 👇
Liquidity refers to the availability of sufficient assets that can be bought or sold in the market without a significant change in their price. In DeFi, liquidity is usually provided by the user who places his assets in liquidity ( LP ) in a certain pair.
Specifically, this happens when you add two assets to a trading pair and create liquidity. For example, suppose you add 1 WBTC and 10 ETH to the liquidity for the WBTC/ETH pair.
Impermanent loss arise from the difference in the price of assets in liquidity and their price on the foreign market. If the price of WBTC increases relative to ETH on the foreign market, it can lead to impermanent losses.
In that case, when you decide to withdraw your assets from liquidity, you will receive less WBTC and more ETH than you originally deposited. This is because the liquidity algorithm automatically adjusts the ratio of assets in the pair to maintain a price balance.
It is important to note that intermittent losses are temporary and disappear when market prices recover and return to their original state. However, if prices continue to move in one direction, impermanent loss can become significant.
To avoid intermittent losses, investors can use other strategies, such as long-term liquidity participation or the use of protective mechanisms such as insurance or hedging.
In addition, it is important to carefully examine market conditions and risks before contributing assets to liquidity at DeFi.
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Impermanent Losses occur when holding assets in the liquidity pool on DEX (AMM).
For a better understanding, let's first consider what liquidity is 👇
Liquidity refers to the availability of sufficient assets that can be bought or sold in the market without a significant change in their price. In DeFi, liquidity is usually provided by the user who places his assets in liquidity ( LP ) in a certain pair.
Specifically, this happens when you add two assets to a trading pair and create liquidity. For example, suppose you add 1 WBTC and 10 ETH to the liquidity for the WBTC/ETH pair.
Impermanent loss arise from the difference in the price of assets in liquidity and their price on the foreign market. If the price of WBTC increases relative to ETH on the foreign market, it can lead to impermanent losses.
In that case, when you decide to withdraw your assets from liquidity, you will receive less WBTC and more ETH than you originally deposited. This is because the liquidity algorithm automatically adjusts the ratio of assets in the pair to maintain a price balance.
It is important to note that intermittent losses are temporary and disappear when market prices recover and return to their original state. However, if prices continue to move in one direction, impermanent loss can become significant.
To avoid intermittent losses, investors can use other strategies, such as long-term liquidity participation or the use of protective mechanisms such as insurance or hedging.
In addition, it is important to carefully examine market conditions and risks before contributing assets to liquidity at DeFi.
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