DeFi Q&A #4
Q. How does Impermanent Loss (IL) work when providing liquidity while the market is going down?
A. Whether the coins are going up or down, the only thing that matters for IL is the relative price change between the assets in the pool.
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Q. How does Impermanent Loss (IL) work when providing liquidity while the market is going down?
A. Whether the coins are going up or down, the only thing that matters for IL is the relative price change between the assets in the pool.
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2/
A few example:
• If one asset stays flat, and the other goes down 50%,
IL = 5.72%
• If one asset stays flat, and the other goes up 100%,
IL = 5.72%
• If both assets go down 30%,
IL = 0%
• If one asset stays flat, and the other goes down 90%,
IL = 42.50%
A few example:
• If one asset stays flat, and the other goes down 50%,
IL = 5.72%
• If one asset stays flat, and the other goes up 100%,
IL = 5.72%
• If both assets go down 30%,
IL = 0%
• If one asset stays flat, and the other goes down 90%,
IL = 42.50%
3/
IL is absolutely terrible if one asset goes to 0. If the assets move roughly the same %, it's not too bad.
A simple way to think about IL, is that you are dollar cost averaging into the coin going down more.
IL is absolutely terrible if one asset goes to 0. If the assets move roughly the same %, it's not too bad.
A simple way to think about IL, is that you are dollar cost averaging into the coin going down more.
4/
I explained IL in more detail here:
I explained IL in more detail here:
https://twitter.com/shivsakhuja/status/1482188295488430086?s=20
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