This means that the price of ETH is 100 DAI at the time of deposit. In this particular automated market maker (AMM), the deposited token pair needs to be of equivalent value. Let’s go through an example of how impermanent loss may look like for a liquidity provider.Īlice deposits 1 ETH and 100 DAI in a liquidity pool. This, however, depends on the protocol, the specific pool, the deposited assets, and even wider market conditions. If there’s a lot of trading volume happening in a given pool, it can be profitable to provide liquidity even if the pool is heavily exposed to impermanent loss. Uniswap charges 0.3% on every trade that directly goes to liquidity providers. In fact, even pools on Uniswap that are quite exposed to impermanent loss can be profitable thanks to the trading fees.

So why do liquidity providers still provide liquidity if they’re exposed to potential losses? Well, impermanent loss can still be counteracted by trading fees. In this case, there’s a smaller risk of impermanent loss for liquidity providers (LPs).

Stablecoins or different wrapped versions of a coin, for example, will stay in a relatively contained price range. Pools that contain assets that remain in a relatively small price range will be less exposed to impermanent loss. In this case, the loss means less dollar value at the time of withdrawal than at the time of deposit. The bigger this change is, the more you are exposed to impermanent loss. Impermanent loss happens when you provide liquidity to a liquidity pool, and the price of your deposited assets changes compared to when you deposited them. So, what do you need to know if you want to provide liquidity for these platforms? In this article, we’ll discuss one of the most important concepts – impermanent loss. Democratizing market making has enabled a lot of frictionless economic activity in the crypto space. These liquidity protocols enable essentially anyone with funds to become a market maker and earn trading fees. Providing liquidity to a liquidity pool can be a profitable venture, but you’ll need to keep the concept of impermanent loss in mind.ĭeFi protocols like Uniswap, SushiSwap, or PancakeSwap have seen an explosion of volume and liquidity. Wait, so I can lose money by providing liquidity? And why is the loss impermanent? Well, it comes from an inherent design characteristic of a special kind of market called an automated market maker. The larger the change is, the bigger the loss. Impermanent loss happens when the price of your tokens changes compared to when you deposited them in the pool. Today, with more than 3 million active holders and 18 billion coins in circulation, BUSD is accepted as payment by a variety of businesses and individuals globally.If you’ve been involved with DeFi at all, you almost certainly heard this term thrown around. Because of this, BUSD is considered one of the safest among the top stablecoin in existence.īUSD is used as a means of payment that can be sent internationally and verified on the public blockchain ledger within seconds. This very strict accounting and reconciliation process necessitates a monthly audit in order to verify the safety of investors’ funds, as well as other security measures put in place by the New York Department of Financial Services (NYDFS) and other regulatory agencies.Īdditionally, BUSD is one of the only existing fiat-backed stablecoins with records that verify the security of its physical reserves. The partnership entails Paxos holding the equivalent of fiat USD in reserve for every BUSD stablecoin in circulation. Binance USD (BUSD) is a stablecoin , so its value is pegged to a fiat currency - in this case, the US dollar.īUSD was launched in September 2019 as part of a joint partnership between Binance and blockchain and finance company Paxos, headquartered in New York.

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