Impermanent loss isn’t always a bad thing….

Hey everyone. I wanted to briefly explain why impermanent loss, relating to specifically liquidity pools isn’t always such a bad thing.

Impermanent loss occurs when a token that is provided to a liquidity pool incurs a loss of value over simply holding the coin due to liquidity pool coin balancing. I won’t cover that mechanic because it’s been done a thousand times over but do check my posts for a dummies guide on that…

So let’s say you add $1k moons and $1k ETh to a liquidity pool. And you stake in there for a year.

Oh no! Moons does a 50x! Whatever will we do?!?!?

Well the thing is, you haven’t lost any money. Sure you’ve lost what you COULD have had but there’s a million scenarios in which you could have made more profit in every trade. Let’s look at what has happened and why it’s not a bad thing. (Always).

Firstly, you’ve got a shit load more ETH. As your moons go up in value the liquidity pool trade then for ETH to balance to pool. So incrementally you get more and more value in ETH. Not as much as if you held Moons but still a tidy profit. (Arguably in a very nice coin too).

Secondly, you’ve been in this pool for a year. You still have a bounty of Moons as your reward yield to trade. Maybe even double what your originally put in. Relax, think, invest again or sell. Super!

Thirdly, you could have done a million other things with your money. You could have bought a new car or a takeaway, put it into savings, lost it at Roulette! The point is, you’ve won. You’ve done better than the 99.9% of other scenarios. It’s like trying to sell at the top, it’s impossible.

Profit is profit, so don’t shy away because “you could do better”. If you think it’s going to yield you a good return, you’ve done your homework and have weighed the risks then don’t let impermanent loss put you off. It’s a buzz word that gets stigmatised against liquidity pools without any real thought process. Think for yourself and do what YOU think is right.

If you need any extra help with this topic feel free to ask! ????