When you’re trading on an exchange like Maiar Exchange, you’re sometimes subject to what’s called “impermanent loss.” That is because the prices of the assets you’re trading are constantly changing, and when you make a trade, your order might not get filled at the same price you expected.
This kind of price fluctuation is called “slippage.”
Slippage is a normal part of trading but can also lead to “impermanent loss.” Impermanent loss occurs when the price of an asset you’ve bought goes down after you buy it, and the price of the asset you’ve sold goes up after you sell it. However, impermanent loss only happens to people who provide liquidity to the liquidity pool.
What is Impermanent Loss?
“Impermanent loss” is a term used to describe the situation where a trader provides liquidity to a market. But the price of the assets they trade moves against them, so they would have been better off not providing liquidity in the first place.
How does Impermanent Loss Happen on the Maiar Exchange?
For example, you provide 100 Egld and $10000 into a liquidity pool. Most exchanges like Maiar DEX only allow liquidity with a 50:50 ratio. So this means the price of 100 Egld is 100 at the moment, worth $10000 in any stablecoin. In Maiar exchange, it will be USDC. So the total money you put in the Maiar liquidity pool will be $20000, hoping to get a profit on the fees within the Egld: USDC pool.
Now let’s say the price of EGLD rises to $110. Now a trader can realize that he can buy Egld at your liquidity pool at $100 and then sell it to somewhere else like Binance for $110. Due to this, he keeps buying more and more while the Maiar exchange algorithm will charge the trader more and more until he stops making money. The trader keeps on buying until the price goes to the current price, which is $110. As the trader could buy around five Egld from your liquidity pool and sell it to Binance until the price moved onto the current price, he made a profit of almost $50. He simply did was to buy and sell from one liquidity pool to another.
Now let’s come back to the liquidity provider. As you can see, the trader has deposited the stablecoin and took out the EGLD. You are left with almost 95 EGLDand 10450 in USDC. So if we do simple math, you now have a total of 196*110+$10450= $20900. That means he made a total of $900 profit. It happened because the price of EGLD went up.
However, to calculate impermanent loss, you need to know how much money you would have profited if you hadn’t invested in the liquidity pool but instead just held both EGLD and stablecoin in the wallet. So if you had done that, you would have made 100*110+$10000= $21000. So this means, in reality, you lost a total profit of $21000-$20900 which is $100. That is what we call impermanent loss.
Note: the calculations are just an example of how the system works and are by no chance the exact figures.
How to Avoid Impermanent Loss in Maiar Exchange?
There are a few ways to avoid impermanent loss:
- The first way is only to provide liquidity when the price of the asset you’re trading is relatively stable. This way, you’re less likely to experience slippage and, therefore, less likely to experience impermanent loss.
- Another way to avoid impermanent loss is always to have a stash of the asset you’re trading and the stablecoin you use to trade it. This way, if the price of the crypto you’re trading goes down, you can buy more of it with your stablecoin, and if the price goes up, you can sell some of your assets for a profit.
Which Method is the Best to Avoid Impermanent Loss?
There is no single best way to avoid impermanent loss. It depends on your circumstances and preferences. If you’re a risk-averse investor, you may want only to provide liquidity when the markets are stable. If you’re a more aggressive investor, you may be willing to take on more risk in exchange for the potential for greater rewards. Ultimately, it’s up to you to decide which method is best for you.
If you want to understand more about Impermanent loss, you can watch this video.
Impermanent loss is a risk that all traders and investors face when trading or investing in volatile assets. It is essential to understand how to calculate and avoid the impermanent loss because it can have a significant impact on your overall returns. I hope this article helped you to understand the concept of impermanent loss in Maiar exchange and how to avoid it. Thanks for reading!