Liquidity Pools + IL
Please be fully aware of what a liquidity pool (LP) is and with the concept of impermanent loss (IL).
What is an LP?
A liquidity pool is a crowdsourced pool of cryptocurrencies or tokens locked in a smart contract that is used to facilitate trades between the assets on a decentralized exchange (DEX). Instead of traditional markets of buyers and sellers, many decentralized finance (DeFi) platforms use automated market makers (AMMs), which allow digital assets to be traded in an automatic and permissionless manner through the use of liquidity pools.
TLDR:
You are providing liquidity for trades to occur and generally staking for interest as a rewardWhat is IL?
Impermanent loss happens when you provide liquidity to a liquidity pool, and the price of your deposited assets changes compared to when you deposited them. The bigger this change is, the more you are exposed to impermanent loss. In this case, the loss means less dollar value at the time of withdrawal than at the time of deposit.
TLDR:
Token prices change all the time and there is no guarantee that what you deposit will have the same (or any) value over timeThese are great tutorials regarding the subject from Whiteboard Crypto:
Last modified 8mo ago