It is worth noting the 50/50 pools are much more common than others, especially on Uniswap. Since trading fees go to liquidity pools, your yield is determined by how many people are using your liquidity pool. If the ratio is 95/5 but nobody is using the pool to trade then you will acquire little or no yield on your deposits.

The most informed decision evaluates the potential return in relation to other pools and opportunities. DeFi platforms have also been incentivizing users to add liquidity to their pools. This is usually done by also giving rewards based on your share of the pool. On Uniswap, liquidity providers can also earn UNI tokens as an extra reward on top of the yield from providing liquidity. This can further increase profit for liquidity providers while simultaneously decreasing the impact of impermanent loss.

What is impermanent loss, and how to avoid it?

Although, impermanent loss isn’t realized until the tokens are withdrawn from the liquidity pool. This loss is typically calculated by comparing the value of your tokens in the liquidity pool versus the value of simply holding them. Since stablecoins have price stability, liquidity pools that utilize stablecoins can be less exposed to impermanent loss.

What is Impermanent Loss (IL)

If ETH is now 400 DAI, the ratio between how much ETH and how much DAI is in the pool has changed. There is now 5 ETH and 2,000 DAI in the pool, thanks to the work of arbitrage traders. If you’ve been involved with DeFi at all, you almost certainly heard this term thrown around. Impermanent loss happens when the price of your tokens changes compared to when you deposited them in the pool. Some users are completely unaware of the risk, others are vaguely familiar with the concept. But most people don’t really understand how and why impermanent loss occurs.

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In this case, you can calculate your impermanent loss by looking at your liquidity. Most popular AMMs — such as Uniswap and PancakeSwap — have opted for simplicity and user experience over features that may mitigate IL. Therefore, it is important for DeFi users to manage Impermanent Loss and other DeFi risks on their own accord. Conversely, liquidity miners can make use of the recently launched Hummingbot Miner 3. The Hummingbot Miner is a specialized liquidity mining bot that enables users to liquidity mine on multiple markets on Binance in a fully-automated manner. Let’s assume you want to yield farm on Binance Smart Chain’s leading decentralized trading protocol, PancakeSwap.

What is Impermanent Loss (IL)

While the basics of impermanent loss have been covered, there are a couple of extra details that are worth knowing before staking liquidity in DeFi protocols. Depending on how those assets changed in price, you may wind up with a “loss” compared to if you had just left those tokens in your wallet in the first place. We can see that, for example, if the price of the asset in the pool goes up by 500% the LPs would experience a 25% impermanent loss. Here is the link to the article with the chart and other useful calculations. Ok, now that we understand what impermanent loss is, let’s see how it can take away LPs profit as the value of one asset increases in relation to the other.

How to Calculate Impermanent Loss (IL)?

Another way of fighting with impermanent loss was recently introduced by Bancor. Bancor V2 pools can adjust their weights automatically based on the external prices coming from price oracles. This can completely mitigate impermanent loss even in the pools with volatile assets.

You connect your Trust Wallet to Binance Smart Chain 8 and exchange some BNB for CAKE so that you can deposit both assets into the pool. In any case, unless you are developing apps around Uniswap, k doesn’t really concern you. What you need to know is that it is a number that changes only when someone adds or removes liquidity, or when fees are collected on trades.