Impermanent loss is one of the most recognised risks for investors when providing liquidity to Automated Money Market (AMM). Although it is not an actual loss incurred from the liquidity providing (LP) position but rather an opportunity cost when compared to simply buy and hold the same assets, the possibility of getting less value back at withdrawal is enough to keep many investors away.
Impermanent loss is driven by the volatility between the two assets in the equal-ratio pool — the more one asset moves up or down relative to the other asset, the more impermanent loss is incurred. Providing liquidity to stable coins or simply avoid volatile asset pairs is an easy way to reduce impermanent loss. However, the yields from these might not be as attractive.
So, the question is: Are there ways to participate in a high-yield LP pool and at the same time reduce as much impermanent loss as possible?
Fortunately for retail investors, the answer is yes, as new innovations continue to solve the existing problems in the DeFi world, providing many ways for traders to avoid impermanent loss.
For details, please read my article on CoinTelegraph — “Impermanent loss challenges the claim that DeFi is the ‘future of France’” where I explain 4 ways to avoid impermanent loss.