Golden Nugget of the Day - What is impermanent loss (IL)? There are many ways to earn yield in crypto e.g. staking, liquidity farming, arbitrage, etc. If you’ve heard mentions of farming high APR yields, they're referring to liquidity farming/mining. Liquidity farming is a reward program that gives out native tokens to users who provide liquidity to a protocol. Such as an automated market maker (AMM) to help the exchange or swapping of tokens. Examples of prominent AMMs are Uniswap (ETH), Pancakeswap (BSC), and Astroport (Terra). One downside of liquidity providing is impermanent loss (IL). In a typical liquidity pool, say LUNA/UST for example, a user has to deposit equal portions of the assets. Assuming you created a LUNA/UST pool on Astroport by providing 100 $LUNA and 10,000 $UST: - Price of 1 LUNA = 100 UST - Pool consists of 100 LUNA and 10,000 UST - Pool liquidity uses the Constant Product Market Maker Formula: x*y=k, so 100*10,000=1,000,000 - Say LUNA doubles to $200. Arbitragers would then buy up LUNA from the pool. Hence, reducing the amount of LUNA and increasing the amount of UST. - You would then end up with around 72 LUNA and 13,888 UST - Your IL would then be equal to the value of your assets if you had held it, compared to what it's valued now in the pool. - IL = (100 LUNA * 200 UST) + 10,000 UST - (72 LUNA * 200 UST) + 13,888 UST = -$1712 UST So, yield farmers will usually only provide liquidity if the rewards in the form of native token incentives outweigh the IL. Want to learn more about IL? Here is a video that will be helpful for you: - https://www.youtube.com/watch?v=8XJ1MSTEuU0 If you’re worried about managing impermanent loss, staking could be a better option. Even better if the staking yield is auto-compounded - as it is on Stader! Do you prefer liquidity farming or staking?

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