What is Impermanent Loss and How Slick Finance Helps You Avoid it?

  • Liquidity providers (You) provide 50:50 liquidity to a liquidity pool in Uniswap. Essentially depositing 1 Ether (for this example consider Ether price $500) and $500 Worth USDT. All is good whilst the value of both sets of tokens remain same.
  • However, Ether is not a stable-coin so it’s value is bound to change. Let’s say the price of ETH goes up to $550 on Coinbase.
  • An Arbitrageur notices this price difference and decides to make a profit. The arbitrageur buys cheaper ETH on Uniswap until there is no more price discrepancy between the exchanges.
  • However as the arbitrageur make this profit, the money is effectively ‘lost’ by liquidity providers, resulting in impermanent loss and this is how LPs feel:
  • Now, let’s assume that the price of Ether were to drop back to $500 on Coinbase, the Arbitrageur would then sell Ether on Uniswap until Ether price at Uniswap also becomes $500. In this case, the LP would not realize thus any loss, thus loss incurred in Step 3 & 4 would become and remain ‘impermanent’ — but this hardly ever happens.
  • As long as the LPs don’t withdraw their liquidity the loss remains impermanent (it is just a fancy term for “unrealized”)
  • If the value comes back to the original levels at which the LPs provided liquidity, the loss remains impermanent but that almost never happens in a dynamic market
  • So the impermanent loss is effectively unrealized loss and is, more often than not, going to become permanent when liquidity is withdrawn
  • Slick.Finance is a Stable-Coin based yield-farming protocol with a focus on investing in Money Market Pools
  • As the value of liquidity provided by investors is always pegged to 1 USD the price fluctuations or arbitrage opportunities don’t exist removing any potential impermanent loss risks
  • Thus, LPs using Slick.Finance will never have a problem of impermanent loss

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