What are impermanent losses?
Impermanent loss is a temporary loss of funds that can occur when you provide liquidity to a liquidity pool. This loss is possible quite simply because there are places other than your liquidity pool where these tokens are traded. Their market value is a factor external to the liquidity pool system, which can play tricks on it.
How does impermanent loss occur?
Imagine that you provide the following tokens which takes a commission of 0.03% transaction fees:
Token Quantity Value
EGLD 1 $ 1000
MEX 1000 1000 $
The liquidity pool, after your deposit, has 1000x it. You therefore own 0.1% of the pool.
The pool therefore contains:
Token Quantity Value
EGLD 1,000 $ 1,000,000
MEX 1,000,000 $ 1,000,000
A little later, the EGLD price rises rapidly on Binance, but your liquidity pool hasn't done that much trading. While EGLD is now trading at $ 1200 on binance, on your pool it is still bought for 1000 MEX. Its price will only change once trades have taken place.
Farming transaction fees doesn't always compensate for intermittent losses, that's the whole nature of the matter.
Source article: Stakepool (French) to view the entire article.
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