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Understanding IL

3 things you need to know about Impermanent Loss
  1. 1.
    When you swap tokens on an AMM, you trade with a liquidity pool
    • LP tokens make up these liquidity pools, which any user can create
    • LP tokens are created by pairing equal amounts (in USD) of two tokens, and smart contracts balance the price of that LP token
  2. 2.
    IL occurs when an LP token's value differs from the value of the same token outside of the pool
    • An LP's value continually changes based on volume and you can accrue a loss when unpairing
    • If 90% of users are selling HBAR, an HBAR - USDC LP will weigh heavily toward USDC
  3. 3.
    DEXs can charge a swap fee to combat IL, Pangolin charges 0.3% that goes directly to LPs:
    • w/ enough volume on a pair, LPs can accumulate fees to counteract IL - also LP can be farmed for extra rewards
Liquidity is the foundation of PangolinDEX