The cure for Impermanent Loss
- If you have been around Leofinance any period of time, you;'ve heard the name Thorchain several times. It is mainly known for it's unique method of providing cross blockchain trading without bridges, but another great feature is impermanent loss protection.
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- As a liquidity provider I am mindful of the risks, which include rug pulls, treasury drainage, code exploits and impermanent loss.
- If you follow popular authors here like
you have seen some pretty good explanations of what it.
Definition
Most use is the difference in price between the value of your tokens held in a liquidity pool versus the price of that same token held in your wallet.
A Big risk for Liquidity Providers
- Providing liquidity to a pool means the price of your token is pegged to the other token in the pair, to some degree, and so if the token price outside the pool goes up, your token value within the pool doesn't go up as much. The flipside benefit is that if the price of the token goes down outside the pool, your token value within the pool doesn't go down as much.
- It's a duel edge sword, it protects you from some losses on the way down, not all, and reduces your gains on the way up, not all, but some.
- Ironically when people look at impermanent loss people leave out of their calculation all the money you make daily providing liquidity. But thats another story, another article. The focus of this post is Thorchains solution.
The solution: “Impermanent Loss Protection” (IPL)
- Thorchain charges a small fee to traders who take advantage of liquidity pools to trade in and out of assets as they make money day trading, arbitrage trading, etc..
- These fees are then paid to liquidity pool asset providers as a form of reimbursement which matches any impermanent loss.
- Thorchain calculates it exactly, so you make money off of transaction fees for providing liquidity, and you are reimbursed for any impermanent loss, so impermanet loss doesn't exist on Thorchain.
Summary
- Another good reason to be a liquidity provider on Thorchain, is that in addition to making anywhere from 15-38% APR on the pools, you are protected from impermanent loss, which is a one of the chief sources of loss for liquidity providers. This is great!
- Impermanent Loss Protection is another interesting feature of the Thorchain ecosystem.
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