The total pool has 10 ETH and 20000 USDT. Your holdings amount to 10% of the entire pool. Say the price of ETH goes up from 2000 USDT to 8000 USDT. Assuming the price of USDT stays stable at 1$ (Again, can't be too sure of that these days), the amount of ETH and USDT in this pool will change due to arbitrage. This pool will now have 5 ETH and 40000 USDT. If you decide to withdraw your tokens from this pool, you will be entitled to 10% + some rewards. 10% of this pool will land you 0.5 ETH and 4000 USDT. The value of your holding at the time of withdrawal is $8000. What if you kept your ETH and USDT out of the liquidity pool? Your 1 ETH and 2000 USDT at the new market rate will be worth $10000. You have actually lost $2000 in opportunity cost or impermanent loss. Impermanent loss differs between different liquidity pools, but it comes down to the two paired assets. Exposure to impermanent loss increases when the assets are more volatile. ![]() In the above example, we assumed that the token paired with ETH is a stable coin. ![]() The impermanent loss could be more significant if ETH were paired with another volatile token, especially if the price of one token went up while the others went down.ĪMMs and decentralized exchanges across the DeFi landscape boast high rewards, with skyrocketing APYs (Annual Percentage Yield) via liquidity pools. The risks of participating in these, however, are not explicitly mentioned. The key takeaway here is that you must look at the underlying tokens, their volatility in the past, and their correlation to estimate impermanent loss and not just focus on the rewards/returns of a liquidity pool. #Ethereum cryptocurrency jettison speedier proofofstake free.#Ethereum cryptocurrency jettison speedier proofofstake software.#Ethereum cryptocurrency jettison speedier proofofstake registration.
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