Thorchain may lessen the sting of impermanent loss and increase profits for liquidity providers.
Impermanent Loss Defined:
Impermanent loss describes the temporary loss of funds occasionally experienced by liquidity providers because of volatility in a trading pair. This also illustrates how much more money someone would have had if they simply held onto their assets instead of providing liquidity.
[source]www.coinmarketcap.com/glossary
Transaction Fee versus Slippage Fee
I read a few articles by Thorchain.org and a few other sources and grabbed an interesting knowledge Pearl. There is a very significant difference in how Liquidity Providers will be rewarded on Thorchain in contrast to other Decentralized Exchanges like Uniswap. In brief, other exchanges pay Liquidity Providers all or a percentage of transaction fees generated by swaps in the trading pair or liquidity pool they provide dollar equivalent asset pairs for or what is termed liquidity. And the more activity in the pool the more transaction fees. But there is the risk of impermanent loss and competition with arbitragers. These things are Bad for Liquidity Providers, but Good for Exchanges.
Slippage Fees greater the Transaction Fees
In contrast to this Thorchain exchanges charges token swappers a slippage fee, calculated on how much slippage their trade will cause. This slippage fee is then shared with liquidity providers. And the larger the trade, the higher the slippage. For those of you who are unfamiliar with the concept of slippage: It’s kinda like big sellers entering any market, the larger the size of their trade, the bigger their impact on the price. The same goes for large traders effect on liquidity pools. This slippage is part of the cause of impermanent loss which liquidity providers lose. Thus charging all traders a slippage fee, especially large traders is calculated to improve earnings for Liquidity Providers, while decreasing their risk of impermanent loss. This is Good for Liquidity Providers, and Bad for Exchanges.
Slippage Fees are unique to Thorchain.
Since slippage fees are currently only paid to liquidity providers on Thorchain, this feature will potentially be a competative advantage for Thorchain to lure liquidity providers to their platform, and away from Ethereum and Binance Smart Chain.
This is because yield farmers are a fickle bunch, who frequently go where the best yields are, of course.
Another competitive advantage of Thorchain is increased security
In order to trade Bitcoin on a centralized exchange you transfer your Bitcoin tokens to the centralized exchange wallet. The coins are no longer protected by your private keys, in your wallet. They are now in someone else’s wallet. This breaks the central rule of cryptocurrency security, not your keys, not your crypto. This doesn’t happen on Thorchain. On decentralized Exchanges like Uniswap you can’t deposit your Bitcoin, you have to trade it for a wrapped Bitcoin Token. Then you have to leave your real Bitcoin with a custodian and trade the wrapped Bitcoin token, basically an ERC20 Token on Uniswap or other exchanges on Ethereum. But on Thorchain it’s atomic swap and so your tokens are tradeable. There’s no need to use wrapped or ERC20 tokens and trust your tokens with a custodian.
Summary
The balance of advantages may favor Thorchain
On a centralized exchange, all transaction fees go to the owner. Traders don’t get any of those fees. But on decentralized exchanges traders get a share or all of transaction fees. It’s been a great attractor of traders. On Thorchain traders get slippage fees, which are estimated to be greater then transaction fees. The net effect is less risk of impermanent loss. Add to that more security from atomic swaps and longterm things seem to favor Thorchain. Thorchain could attract the majority of business in Liquidity Provision and Yield Farming. Thorchain could literally be like a vacuum cleaner or a black hole, that sucks up all the trading.
But don’t take my word for it, do your own research. Remember the the cryptocurrency space is constantly changing, and evolving. Keep reading and try to keep up.
Graphics by Leofinance Graphic Credit
Shortsegments is a writer focused on cryptocurrency, the blockchain, non-fungible digital tokens or NFTs, and decentralized finance.
Read more of shortsegments articles here: @shortsegments
