Will there be any loss of liquidity mining costs? How to avoid impermanent losses?
RecentThe concept of DEFI is still popular, and it became DEFI last yearThe first year, while mobile mining andDEFI is closely related. In short, liquidity mining is a way of currency distribution, which can be simply interpreted as the DeFi version of "buying and selling"I.emining”, while the liquidity mining rewards mainly include blockchain rewards, and the transaction commissions generated and paid to liquidity miners when DEX decentralized exchanges are used. However, to carry out blockchain mining requires capital investment, and risks will be encountered later.Therefore, some novice investors asked whether there would be any loss of liquid mining principal? How can we avoid gratuitous losses? Next, let's have a look.
Liquidity mining costgoldWill there be any loss?
firstFirst, there must be losses. As we all know, decentralized exchangesDEX uses automated market makers such as AMM. AMM price is to collect all assets into the working capital pool and calculate the price automatically according to a certain algorithm. For example, Uniswap uses stable multiplication X * Y=K. Without relying on market makers, they can buy and sell in real time and fairly.
However, this price is only created in this trading flow pool, and it is another price in other flow pools, which cannot keep pace with the price in the outfield. So this will create arbitrage space, and the arbitrageurs can"Leveling the price", until the price of the trading pair is restored to the original proportion, reaching the balance between supply and demand. The profit earned by the arbitrageur is the loss of the liquidity provider (i.e. the investor participating in the liquidity mining). It means that your cost has fallen, and your profits in the mining pool may not be equal to the loss caused by the price of being moved.
How to avoid impermanent losses?
liquidity provider nothingMethod to avoid impermanent losses. But theysureUse some countermeasures to mitigate this kind of risk. The following are some basic strategies to mitigate volatile losses.
one、Bypass high volatility liquidity pool
imageDigital monetary assets like ETH are not linked to the value of external assets as stable currencies, so their value will fluctuate with market demand.
It should be noted that the liquidity pool with volatile assets as the core is a larger source of the risk of volatile losses. Although likeCrypto blue chips such as ETH and WBTC may fluctuate greatly, but other small currencies face more probability of intraday price adjustment, so from the perspective of volatile losses, their risks are greater.
If it is particularly important for you to prevent volatile losses, it is a wise choice to prevent providing liquidity to the highly volatile liquidity pool.
two, SelectLiquidity pool leading to the same asset
for exampleBoth USDC and DAI are oriented to the value of US dollars, so these stable currencies are always traded around US $1. Then there are other encryption assets, such as sETH and stETH for ETH, WBTC and renBTC for BTC, and so on.
In these liquidity pools leading to the same asset(e.g. USDC/DAI pool), the volatility between these currencies is very small. Such dynamics will naturally cause little or no transient loss to LPs. Therefore, if you want to become an LP and gain costs, but do not want to face a large number of volatile losses, it is a good choice to choose to provide liquidity to these liquidity pools that lead to the same kind of assets.
three、Providing liquidity to the pledge pool
stayIn DeFi, not all LP opportunities come from the dual currency liquidity pool. In fact, for LPs, other popular sources of income are stakingtools. The pledge pool is generally used to ensure the solvency of DeFi agreements (when faced with insolvency), and only one type of asset can be deposited in the pledge pool.
For example, loan agreementsLiquidity pledge pool StabilityPool: The customer provides the StabilityPool with LUSD stable currency to ensure the solvency of the Liquidity Agreement. As a swap, these LPs will gain profits from the accumulated liquidation costs of the Liquidity Agreement. There will be no impermanent losses in such a pledge pool, because there will be no rebalancing between the two types of property!
four, SelectLiquidity pool with unbalanced property ratio
The liquidity pool with unbalanced property ratio means that the asset value ratio in the pool is not the traditional50/50 split liquidity pool. Balancer is famous for developing such flexible liquidity pools. The proportion of assets in the liquidity pool on this platform can be 95/5, 80/20, 60/40, etc.
The proportion of these assets will have an impact on contingent losses. For example, based onThe status of 80/20 AAVE/ETH pool. If the price of AAVE is higher than that of ETH, since most of the risk exposure of LPs in the pool is AAVE (accounting for 80% of the pool), the impact of the price adjustment on the transient loss requires LPs to provide 50/50 liquidity for AAVE/ETH pool.
Therefore, providing liquidity to such a liquidity pool with an unbalanced proportion of assets is also a way to reduce volatile losses, although it still depends on the price performance of the underlying assets.
five、Participate in mobile mining plan
Today, mobile mining plans(that is, the protocol is distributed to the original LPs) is ubiquitous in DeFi. Why? Because liquidity mining provides a simple way for these DeFi protocols to achieve decentralization of protocol governance, attract liquidity, and gain the hearts of initial users.
However, there is another advantage of participating in mobile mining. In many cases, token rewards obtained by participating in mobile mining can fillAny volatile losses faced by LPs. In fact, if the token reward you received in two months based on your participation in liquidity mining is equal to 25% - 100% of the liquidity value you originally saved, then it is not worth mentioning that you suffered 5% of the impermanent loss during this period.
At least, these token rewards can be offsetLP suffers from unpredictable losses, so as an LP, you should always keep in mind these liquidity pools that provide incentives.
Speaking of this, I believe that you have a certain understanding of whether there will be any loss of the liquid mining principal and how to avoid the free loss. in general,along withAMMs are becoming more and more popular, and unpredictable losses will be manyinvestorA situation that has to be dealt with.But there's some good news，namelyThere are some possible strategies that can help you do this with the ability and discretion.However, Xiao Bian still said that investment is risky, so you should be careful when entering.