What are impermanent losses and how can I avoid them? is one of the most commonly asked questions we receive about farming on QuickSwap. We comprehend that you want to safeguard (or perhaps grow) your hoard, and you may have heard that one technique to do so is via offering liquidity on a DEX. It’s true that some people have done very well with liquidity farming, whilst others have endured severe temporary losses that they’ve made permanent.
First off, what exactly does that term mean?
The possible loss one incurs when providing liquidity for a pair is referred to as an Impermanent Loss (IL). It happens whenever there is a significant difference in token prices. These losses are referred to regarded as “impermanent” since they might be reversed if one keeps supplying liquidity to the pair and the tokens they gave for return to their previous ratio.
Say Louie offers liquidity for the USDC-ETH pool(this is just an informative example), for instance, and USDC appreciates fast against ETH.
To offset the liquidity he gave, Louie will lose some USDC and gain some ETH. The losses Louie experienced would no longer exist if he kept his liquidity in the pool and the ratio rebalanced, which would occur if ETH increased in value relative to USDC at the same rate that USDC increased in value relative to ETH.
Why does this happen?
QuickSwap is an AMM or Automated Market Maker. Coin and token prices on AMMs do not fluctuate with the outside market. AMMs depend on the market self-adjusting automatically through arbitrage.
Arbitrageurs profit by taking advantage of pricing differences between markets. They buy and sell assets that are overpriced or underpriced until the AMM price equals the price on the outside market.
The most frequent impairment losses occur in pairs with strong volatility.
Therefore, you must establish your level of risk tolerance before you start supplying cash.
-Will you recheck to see how your pair is doing every few hours?
-Do you think the pair of assets you’re providing will fare well in the long run?
Only you are qualified to respond to these questions.
How to resist it?
The simplest and most direct strategy to guard against suffering temporary losses is to don’t provide liquidity. However, many people find it difficult to handle the possibility of earning over 100% APY in addition to the profits from yield farming pairs in QuickSwap’s rewards program. Therefore, choosing a pair (or pairs) that are relatively reliable is the greatest method to reduce losses if you’re determined to participate.
There are 3 different methods, that we learned also from Quickswap team.
Number 1- PROVIDING STABLE PAIRS
Stablecoin pools like USDT-USDC, DAI-USDC, DAI-USDT, MAI-DAI, and MAU-USDT were used by some users to carry out this action. The risk of temporary loss in providing for these assets is far smaller than with other pairs because they are all tied to the dollar (and maintain a close relationship with $1).
Number 2- PROVIDING FOR ASSETS THAT YOU THINK ARE LONG TERM
Many people choose to provide liquidity for pools that contain two assets instead of stable/stable pools because they want to see bigger potential rewards and think both assets will increase in value over time. The MATIC-USDT pool, which has a higher APY right now, is one that many people choose to join. Because LPs are now eligible for double payouts for a restricted number of MATIC pools, pools like the MATIC-USDT pool can also be advantageous.
Number 3- DON’T PUT ON LP; STAKE
The project you are currently in, as well as Quickswap, features several incredible solutions that let users create yield without putting their assets in danger for those who wish to not only reduce but completely eliminate the chance of impermanent loss.
You can choose a STAKING PROGRAM available for the coin/token you are choosing and stay safe. To staying safe, we mean that you do not put your assets “on board”, but put them “aside”(stake) for a limited period of time, in order to create a passive income: depending on the APY, you will generate more of that assets.
In essence, there is no way to offer liquidity and completely eliminate the risk of IL, but QuickSwap and Genius Assets offer several options for earning yield without risking any losses. It just depends on what you want to do.
Will you risk pursuing high APYs? Your decision is up to you!