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Understanding IL
3 things you need to know about Impermanent Loss
- 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.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.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
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Last modified 7mo ago