Impermanent loss is closely related to the activity of gain of rewards which must be attained by lending the tokens on Yield farming. However, this activity has a lot of difference from staking due to the fact that investors need to put their funds in the blockchain to confirm transactions and to earn the rewards of staking. On the other hand, yield farming allows people to lend their tokens to a pool of liquidity.
How Can Users Avoid The Concept Of Impermanent Loss?
The rewards come based on the protocol and hence it will be different every time. Though the majority of the people believe that yield farming earns more profit as compared to holding, however, it has its own risks like price and control risks and liquidation risks.
The number of tokens and providers of liquidity in the pool of liquidity states the level of risks in the impermanent loss. One token is connected with another one which is mostly a stablecoin like Ether or USDT. The pool of liquidity with stable coin assets which remains within the price level is supposed to faceless loss. Thus, when they possess stablecoins, automatically the risk declines.
Though it is risky, still providers of liquidity on AMMs continue to offer services as the fees of trading can make up for the loss. An example of this is Uniswap pool as they are predicting loss, however, are calm as their fees of trading (0.3%) can help the company earn profit. Protection of impermanent loss is an insurance-type service that safeguards liquidity from losses that were unexpected.
Profit can only be incurred by liquidity when it is on AMMs and the financial assistance from farming is more than loss. In order to activate the service of ILP (impermanent loss protection), the tokens must be mandatorily staked on the yield farm. The loss that took place in between the first 100 days, can be covered at the withdrawal time.
