Is there a way to avoid non permanent losses? If you are interested in adding tokens to the Decentralized Exchange (DEX), you are likely to be affected by volatile losses. Since the volatile losses and DeFi liquidity pools are intertwined, it is important to review how these pools work. Although you cannot "avoid" non permanent losses when storing unstable cryptocurrencies, the following three best practices may help reduce their impact.

1. Use protocols with permanent loss protection (ILP)

Some DeFi protocols, such as Bancor and ThorChain, have introduced a project called non permanent loss protection (ILP) to reduce the impact of non permanent losses. ILP aims to ensure that liquidity providers can at least achieve balance of payments when deciding to withdraw from the liquidity pool. To this end, ILP will subsidize any loss of value due to non permanent losses by using funds from the DeFi agreement.

However, liquidity providers will not enjoy 100% protection on the first day. Most ILP programs reward only 1% protection per day. This means that you need to put your token pair in the liquidity pool for 100 days to ensure that you can recover 100% of your initial investment.

In addition, the ILP program will not provide additional funding if the liquidity provider receives income equal to or greater than their initial investment. In other words, if the dollar value of the token reward you receive matches the amount you originally deposited in the liquidity pool, you will not receive ILP protection.

2. Use only low volatility trading pairs

A simple way to reduce the risk of non permanent losses is to focus on low volatility token pairs. The less volatile the cryptocurrency is, the less likely you are to experience significant non permanent losses.

Since, DAO and other stable currencies maintain a 1:1 ratio with the US dollar, they are the cryptocurrencies with the least volatility. Unless the stable currency item you selected fails, your initial deposit in the stable currency token pair should remain unchanged.

In addition to a stable currency, liquidity providers can also consider storing money in packaged pairs of currencies. Packaging cryptocurrency is used to transfer non local tokens to the alternative blockchain. The value of the wrapper encryption should always be the same as the underlying asset. For example, the value of 1 ETH should always be equal to 1 wrapped ETH.

Although the price of ETH is more unstable than the stable currency, a pair of ETH wETHs should have the same market price at any time. You can pair these low volatility tokens on any index, but Curve Finance is famous for providing stable and packaged token pairs.

3. Consider multi asset liquidity pool

Most dex relies on 50/50 token pairs, but some DeFi platforms allow users to mix their token percentages. It is worth noting that the DeFi protocol balancer uses a "weighted pool" to provide liquidity providers with greater token flexibility. Users on Balancer can add multiple digital assets with different percentages, instead of providing 50/50 token segmentation.

Although this strategy cannot eliminate non permanent losses, it helps liquidity providers better manage their risks. For example, you can create a balancer portfolio, in which 80% is invested in stable currencies and 20% in ETH. You can also add more than two tokens to an account on the Balancer and other DeFi websites, which may mitigate the impact of non permanent losses.

ending

The above is the answer to three ways to avoid permanent loss. If you deposit digital funds in the DeFi liquidity pool, you may be worried about "impermanent losses". Although those who have experienced impermanent losses in per unit area agriculture will not "lose" all their cryptocurrencies, if they put tokens in their wallets, they could have earned more (or lost less).