If you’re a liquidity provider, you’ve probably thought about how to avoid impermanent loss when investing your money. While the number of new DEXs is increasing, impermanent loss still remains a deterring factor for potential liquidity providers to invest their liquidity. Let’s see how you can avoid impermanent loss by providing liquidity on Algebra.
What is Impermanent Loss?
Impermanent loss occurs when you provide liquidity to a liquidity pool and your deposited assets change in price compared to the moment you deposited them.
The more they change, the higher the risk of impermanent loss is.
- Impermanent loss is temporary as long as the fee rewards you earn compensation for the losses and/or the price returns to its initial level.
- If you remove your funds from the pool before their value is restored, the impermanent loss will be realized and become permanent!
Imagine you provided liquidity to a pool of tokens that was worth $1,000. The approximate APR is 10%. In the ideal scenario, at the end of the year you will have $1,100.
However, what if the token’s price dropped by half and you end up owning only $550 worth? In this case, even if you earned profit from trading fees, your total investment plummeted.
It turns out that a highly-volatile asset represents a risk factor for liquidity providers. Well, how can you prevent this situation?
The Algebra DEX: Minimum to Zero Impermanent Loss
With key innovations and the newest features, Algebra has decreased the risk of high impermanent loss by introducing their dynamic fee model, high-APR farming, and concentrated liquidity positions.
- Dynamic Fee Model
This novelty feature sets optimized fees based on volatility, trading volume, and pool volume. This way, the right balance between traders and providers is guaranteed.
- High-APR Farming
In other words, high-APR farming allows you to earn extra incentives that can compliment the fees you earn from trading; thus preventing you from impermanent loss, even if your token loses value over time.
- Concentrated Liquidity
Our concentrated liquidity technology allows you to place your assets at specified price intervals, which allows for higher capital efficiency and deeper liquidity. What does this mean?
- You set a price range within which your assets will provide liquidity.
- You get a percentage of trading fees from the liquidity if the current price of the assets stays within this range. If you hit the right price range, your capital efficiency will be higher!
- As a liquidity provider, you have the ability and flexibility to independently adjust the conditions to minimize impermanent loss or even prevent it entirely.
- Higher capital efficiency can compensate for your potential losses.
Let’s imagine ALGB’s price is $0.15 at the moment. You enter the ALGB/USDC pool and set a precise $0.14–0.16 range.
Overall, you will receive what you placed + the rewards if you choose the right price range. To minimize impermanent loss, expand the range limits: the ROI will be lower, but so will the risk of impermanent loss!If you ever provided liquidity on Uniswap V3 or any other DeFi protocol and experienced high impermanent loss, harness the power of Algebra; helping you minimize the risks of losing your capital. Scroll through every feature once again and start earning without fear of losing your investment.
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Source: https://coinpedia.org/news/how-to-avoid-impermanent-loss-in-crypto/