Impermanent Loss Of Liquidity Pool

Cake Defi has introduced its liquidity pool with attractive interest rates.

I had only tried staking my tokens for rewards in the past and providing pairing tokens into liquidity pool was a new experience for me.

I thought that it was like the way how I earn from staking but I was really wrong.

https://www.youtube.com/watch?v=8XJ1MSTEuU0 Video Source

In most liquidity pools, the pairing tokens would have equal values when we first provide liquidity into the pool.

We can start earning rewards that can be as high as 300% APY for quite a number of liquidity pool.

After becoming a Liquidity Pool provider, I realised that the number of tokens that I had provided could change due to the price change of tokens leading to imbalance of my pairing tokens.

When this happens, the number of tokens may be readjusted. The greater the change of price, the more loss may occur.

Arbitrary would enter to buy the cheaper tokens to achieve a balance.

The high profit comes with a higher risk then.

Another possible fact may be the rewards that we obtained may be able to help us to offset the tokens lost in the pool that result in us still earning a profit.

Experiential learning is an effective way to understand abstract concepts.

I would never have understood what is impermanent loss about until I tried it myself with a lot more factors that I did not mention in this post.

Cake Defi is still a great place to earn in staking and liquidity mining since it is a reliable company that is registered in Singapore.