The cryptocurrency world is always in movement and always improving. Many new terminologies appear as new ideas and applications are added. At the same time, people are continually encountered new terms that appear to arise in a new pattern. From liquidity pools to staking and farming… many seem lost. With the rising popularity of DeFi platforms, more and more users are beginning to dive deep into the crypto world.
In this article, we will talk about how to participate in the ThorChain liquidity pool, what impermanent loss is, what are liquidity pools, and much more. Let’s take a look at it in more detail.
What are liquidity pools?
Before we get into what is impermanent loss, we need to define what liquidity pools are. In the decentralized finance (DeFi) world, liquidity pools became well-known for giving liquidity to liquidity seekers. For instance, brokers who present short selling usually lend their traders cash before getting it back with instant returns. When the trading volume gets extremely high, these brokers require more liquidity as they would be placing themselves at significant risk by supposing the risk of the other side. For this logic, liquidity pools were created. They basically pool crypto investors’ funds and give them to brokers, who in turn lend them to their traders. Once the traders have finished their trades, the brokers withdraw that amount and a fee.
With Automatic Market Makers (AMM) like Uniswap, the broker (the middleman) is no longer involved. So, the liquidity providers instantly fund the traders on an AMM platform and obtain fees for carrying their tokens in the liquidity pools. The difference between simple hodling and staking in liquidity pools is that in the latter case you make passive income while your token appreciates in value. With greater profits comes greater risk, and this is what we call impermanent loss.
Liquidity pools make it straightforward for liquidity providers to make money on their crypto holdings. For example, an Ethereum HODLer could give their ETH to a liquidity pool to earn money over time. Most liquidity pools incorporate a wallet, such as MetaMask or any other Wallet. After attaching your wallet, you can send tokens to the protocol and obtain stimulus tokens. The earnings possibility depends on the tokens you choose and different platform-precise settings, such as Uniswap’s fee levels.
What is impermanent loss?
Impermanent loss occurs when you give liquidity to a liquidity pool, and the cost of your saved assets varies corresponding to when you saved them. The more significant this shift is, the more you are susceptible to impermanent loss. In this matter, the loss represents less USD value at the time of withdrawal than at the time of saving.
Simply put, the impermanent loss is the disparity between holding your tokens in an AMM and holding your tokens in your wallet. This generally happens when the price drops or increases within the AMM pool. The more the price drops or climbs, the greater the impermanent loss. Note that it states “impermanent” because if you don’t liquidate your position, the loss is still “unrealized.” To explain, imagine you are trading an asset and its price starts dropping. Your broker would then offer you your “unrealized P&L”, which in this matter is a loss. The asset could go back up and you could be back in the black, but if you close your position your loss will be ‘realized’, indicating ‘permanent’.
So, impermanent loss occurs due to price changes where the liquidity providers take over the other side of trading in an AMM environment against the traders.
What is Thorchain (Rune)?
Thorchain is a decentralized exchange that permits trading across numerous chains. For example, it allows traders to trade across more than one blockchain. While the DeFi world just earned huge attention, users have long spoken about the necessity to build an ecosystem where economic services can be readily accessible. This contains time wastage, a common event in the conventional banking system. It is safe to say that although Thorchain is a fairly new exchange, its use case is something to look out for, particularly as the digital asset world welcomes cross-chain trades. Further, Thorchain is also one of the first to allow trading cross-chains without pegged tokens.
How to Provide Liquidity on THORSwap?
As mentioned earlier, a liquidity provider (LP) is a person who puts their assets into liquidity pools. Traders will utilize these liquidity pools to trade their assets. By supplying liquidity to traders, you will make the yield on your assets from trading expenses, incentives, and block prizes.
In RUNE, the impermanent Loss Protection (ILP) is there. The liquidity Providers will obtain linear IL protection for 100 days. Basically, this means users will add 1% security for every day that they provide liquidity.
The pools use native assets on their native chain. i.e save local BTC into the RUNE-BTC liquidity pool to make yield. For every deposit, there must be an equivalent ratio of RUNE paired with the ASSET. Every liquidity pool will correlate to 50% RUNE and 50% ASSET.
How to Add Liquidity?
Liquidity pools: Image Source: ThorChain
Step: 1: The first step is to upgrade your BNB.RUNE or ETH.RUNE to THOR.RUNE. The detailed steps are given here.
Add Asset Asyemtrically
Step 2: Next, add RUNE Asymmetrically. It is important to note that the Asymmetrical Deposit is when users pool one-sided with an asset. For example, you are saving an unequal ratio of ASSET in an equivalent paired liquidity pool, hence why it is asymmetrical. When you pool asymmetrically your ASSET is transformed into 50% RUNE and 50% ASSET (this is named rebalancing).
Add Liquidity
Step 3: Now add the ASSET Asymmetrically. It is important to note that You will require the native asset to deliver gas for the deposit transaction.
i.e saving BTC, you will require extra BTC to pay for tx fees.
Expert mode
Step 4: Now, enable the expert mode. It permits users to pool 2-sided assets asymmetrically i.e 2 BTC + 1000 RUNE. The important thing to remember here is that you might encounter slippage due to rebalancing from saving asymmetrically.
Step 5: Add liquidity
Finally, after connecting your wallets, you can begin adding liquidity from the Desktop/Web app. To do this, go to “DEPOSIT’” in the sidebar, choose the asset you want to pool, how much, and what arrangement (symmetrically, asymmetrically, or pro). Next, Click add liquidity, and in this way, you become a THORChain Liquidity Provider!
114% on $atom/ $rune pool on ThorChain?
why is no one talking about this? getting this yield on two of the best projects out there is insane, especially if you’re a longterm investor.
114% on $atom/ $rune pool on https://t.co/u5vTL96c7y@THORChain @cosmos pic.twitter.com/VBtU0NF814
— Curious J ⚛️? (@Curious__J) August 7, 2022
If you are a long-term investor then getting this yield on two of the best projects out there is insane. 114% on $atom/ $rune pool on https://app.thorswap.finance.
What is ATOM?
One of the most influential problems with blockchains is that they are built independently, and few can disseminate data. ATOM is the token that supports the COSMOS ecosystem of blockchains. Users can employ ATOM for staking and make a bonus for it. Between 2019 and 2020, the ATOM price was between $3 and $8. Yet, the token was one of the successors of the Crypto bull run in 2021 that saw it hit $29. The token is presently listed on popular crypto exchanges like Binance and Coinbase.
The ATOM token is the Cosmos network token. It is responsible for allowing users to delegate and validate within the network. It also permits charging fees, for example, to stop spam in the network. The ATOM token was issued by the development team in 2017. In the process, Cosmos sold 168 million tokens worth $17 million in just about 30 minutes.
With the ATOM token, the holders of the cryptocurrency have the opportunity to vote on modifications in the Cosmos blockchain. The weight of the vote depends on the number of tokens owned in ATOM. Yet, you have to be among the top 100 assessors to be able to vote as a validator. However, smaller investors can delegate and assign votes to the large validators.
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Source: https://cryptoticker.io/en/what-are-liquidity-pools-thorchainrune/