#aelfDeFi What is impermanent loss?

1/ Impermanent loss happens when the price ratio of deposited tokens changes after you deposited them in the pool.

The larger the change is, the bigger the impermanent loss.

#aelf #blockchain #aelfblockchain #aelfFAQ #aelftech 2/ This is why AMMs work best with token pairs that have a similar value, such as stablecoins or wrapped tokens.

If the price ratio between the pair remains in a relatively small range, impermanent loss is also negligible. #aelf #blockchain #aelfblockchain #aelfFAQ #aelftech

#aelfDeFi #DeFi #aelf What is a liquidity pool?

1/ Liquidity providers (LPs) add funds to liquidity pools.

You could think of a liquidity pool as a big pile of funds that traders can trade against. 2/ In return for providing liquidity to the protocol, LPs earn fees from the trades that happen in their pool.

In the case of Uniswap, LPs deposit an equivalent value of two tokens – for example, 50% ETH and 50% DAI to the ETH/DAI pool. #aelfDeFi #DeFi #aelf

#aelfQA 1/ How does an automated market maker (AMM) work?

An AMM works similarly to an order book exchange in that there are trading pairs – for example, ETH/DAI.

However, you don’t need to have a counterparty (another trader) on the other side to make a trade. 2/ Instead, you interact with a smart contract that “makes” the market for you.

There’s no need for counterparties in the traditional sense, as trades happen between users and contracts.

Since there’s no order book, there are also no order types on an AMM.