Impermanent Loss on Defi
Here a short explanation of what Impermanent Loss means and what it is.
Some words before on Defi Farms.
On a Defi Farm, you can lock up 2 Assets. For example BUSD/USDT. For each swap, a small fee goes to the liquidity provider. That's why people love Defi.
( Yes I don't understand it from day 1 too. I thought a Den in the better thing because save. But no fee earning. )
For 2 Stable coins, it doesn't matter because there should be no big price swings.
But for example BHive/BUSD ( one I want to see in the future, haha)
Hive is 1$ worth and BUSD is also 1$ worth.
we cash in that example 100 Hive and 100 BUSD in, total value 200$.
The Total pool has 1000$ in it, we own 20% in that example of the pool ( 500BUSD/500Hive total).
The ratio is 1 to 1.
Hive will now go to 5$. Traders will now go to the pool and buy the Hive/ add Busd to it.
That does change the Ratio between Hive and BUSD in the pool ( And because there is no Orderbook, the price reflects out the ratio of both assets).
The Ratio changed now to 1250BUSD and 250 Hive, If we now want to cash out of the farm we get:
20% = 250BUSD 50 Hive, total Value: 500 USD.
If we had held the 100 Hive + 100 BUSD and we do nothing, it would be 600$ Total Value.
The Impermanent Loss would be 100$.
As bigger the possible movement between 2 Assets can be, as the bigger can be the Impermanent Loss. The fees liquidity provider gets is the taking risk-reward. (That's what I don't understand on Diesel pools on HE, they look useless to me, high risk no reward).
Also the Ratio of the assets.
I hope it helps a bit and I don't do a mistake in numbers. I look twice so maybe it's right, haha.
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