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Author: Admin | 2025-04-28
Price for every asset based on buy and sell orders. This means that the price of an asset on DEX could be signifantly lower than its market value. Let's take a simplified example of how this could happen:Say you created a market by depositing 20,000 USDT and 1 BTC. In this example, let's say the price of 1 BTC is 20,000 USDT at the time of creation.Later, the external markets could have pushed the price of 1 BTC to 25,000 USDT. Arbitrageurs swarming the space will notice this price difference and immediately buy BTC from your pool at a price lower than that of the market until the price balances out.Now, your pools would have more USDT than BTC.Let’s put this in numbers, assuming the entire BTC supply has been exhausted.Initial Deposit20,000 USDT + 1 BTCTotal pool value in USDT = 40,000 USDTExternal Market1 BTC becomes 25,000 USDT.At this rate, the value of the liquidity pool should be = 45,000 USDT (because BTC increased by 5,000 USDT)However, since the pool’s BTC has been exhausted, it will be left with 40,000 USDT and 0 BTC.Hence, the new pool value = 40,000 USDT. This is 5,000 USDT less than the external market.This difference of 5,000 USDT is called “impermanent loss.”It is called “impermanent” because the value of assets in the pool can still achieve their state equivalent of external markets. The loss is permanent only if the liquidity providers exit the pool at the time of an impermanent loss.If you want to minimize the risk of impermanent loss, then consider providing liquidity to pools with stable assets (low volatility). Stablecoins are an excellent example. Liquidity pools like USDT/USDC or DAI/USDT would experience little to no impermanent loss. Doing so allows liquidity providers to collective incentive rewards and trading fees without exposing themselves to the risk of price volatility.You can better understand this concept by punching in some numbers in CoinGecko’s impermanent loss calculator to see for yourself.High SlippageSlippage is the difference between the expected price of a trade and the actual price at which the trade is executed. This happens because the
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