When a crypto investment is depending on the value of more tokens (liquiduity pool)

Have you ever been involved with providing liquidity to trading pools on different exchanges? You don't need this on centralized exchanges, because there you will always buy tokens from another actual person (or bot), meaning that your order will only go through once the price is agreed on between a seller and a buyer.

But, when you decide to purchase a token on a decentralized exchange like Uniswap or PancakeSwap, then you don't take a look at an actual order book. Instead, there is a liquidity pool consisting of both tokens in the trading pair, and when you trade, you trade with the liquidity pool. Instead of receiving tokens from a seller, you will receive tokens from the pool and the ingredients in the pool will depend on the value of the tokens (normally there should be a 50%/50% value of both tokens in the pool). So, if you have a liquidity pool valued $10,000 in total, then there should be $5000 worth of A tokens and $5000 worth of B tokens (at all times).

But, this is a risky business, and most websites and exchanges will warn you about the dangers of the concept named impermanent loss. This is happening if you put tokens into a liquidity pool, and then one (or both) tokens will drop in price. Even though you get income from the trading fees, you will still be in a big minus because one or both tokens have dropped in price.

Of course, you would have lost money just holding the tokens as well as the USD price has dropped for both of them, but when we think of impermanent loss, most of us think of the effects when one token drops a lot in price, and you will end up receiving way more that token in return, compared to the other token that is way more worth.

If you want to learn more about impermanent loss and see real examples of how it can influence your involvement in liquidity pools, click the link earlier in the article, and you will find a lot of useful information and good examples.