Impermanent loss, for the uninformed, is one of the most famous risks that investors have to deal with when passing liquidity to an AMM in the DeFi sector. While it is not really an actual loss that has been incurred from the position of the liquidity provider- but is rather an opportunity cost that comes into fruition when compared with the purchasing and holding power over the same assets. This begets the possibility of receiving less value back at withdrawal which seems to be enough to keep most of the investors away from DeFi.
Impermanent Loss Could Be Mitigated Through Asset Division
Impermanent Loss is usually driven by the volatility between two different assets in the pool of equal ratio- which implies that the more one asset moves in different directions that it’s relative to the other asset, the more loss is usually incurred. There is a way to reduce such loss- providing liquidity to stablecoins, or simply avoiding pairs that comprise volatile assets. However, the yields from such strategies might not seem that attractive.
Retail investors would be glad though- as there are a few innovations that could solve this problem in the DeFi world, thereby providing traders with a few ways with which to avoid impermanent loss.
Interestingly, when speaking about such a loss, most people would often refer to the traditional 50%/50% equal-ratio two-asset pool- ie, most investors would have to provide major liquidity to two assets that have the same value. As the protocols of DeFi evolve, most of the uneven liquidity pools have started coming into the picture to help reduce such loss.
Now, along with uneven liquidity pools, most of the multi-asset liquidity pools would help in the reduction of impermanent pools. All one would have to do was add more assets to the pool, which would bring forth more diversification.
