Strategies to Reduce Impermanent Loss in Liquidity Pools

Is there a % in growth that it’s a good idea to pull funds from an LP to avoid losing more if that coin continues to pump? I’m new to defi LPs and curious about people’s strategies.

Honest, I have read a bunch about impermanent loss and still only understand the basics.

If you are over trading or you can't hold your winners than there is simple trick to preserve your capital.

"Just turn your trading time frame one level higher"

If you are trading on 1 minute change it to 5 minute, if you are trading on 5 minute than change it to 15 minute time frame.

You will protect so much of your capital using this simple trick. You can stay in the market for longer and you will better understand the market than the smaller time frame.

This advice is only applicable to loss making trader or those who prefer relax trading experience and do not chase quick money.

After you grow your capital from trading you can again change your time frame to lower. Eventually you will discover that to GROW you always want to go higher not lower.

Hey everyone. I wanted to briefly explain why impermanent loss, relating to specifically liquidity pools isn’t always such a bad thing.

Impermanent loss occurs when a token that is provided to a liquidity pool incurs a loss of value over simply holding the coin due to liquidity pool coin balancing. I won’t cover that mechanic because it’s been done a thousand times over but do check my posts for a dummies guide on that…

So let’s say you add $1k moons and $1k ETh to a liquidity pool. And you stake in there for a year.

Oh no! Moons does a 50x! Whatever will we do?!?!?

Well the thing is, you haven’t lost any money. Sure you’ve lost what you COULD have had but there’s a million scenarios in which you could have made more profit in every trade. Let’s look at what has happened and why it’s not a bad thing. (Always).

Firstly, you’ve got a shit load more ETH. As your moons go up in value the liquidity pool trade then for ETH to balance to pool. So incrementally you get more and more value in ETH. Not as much as if you held Moons but still a tidy profit. (Arguably in a very nice coin too).

Secondly, you’ve been in this pool for a year. You still have a bounty of Moons as your reward yield to trade. Maybe even double what your originally put in. Relax, think, invest again or sell. Super!

Thirdly, you could have done a million other things with your money. You could have bought a new car or a takeaway, put it into savings, lost it at Roulette! The point is, you’ve won. You’ve done better than the 99.9% of other scenarios. It’s like trying to sell at the top, it’s impossible.

Profit is profit, so don’t shy away because “you could do better”. If you think it’s going to yield you a good return, you’ve done your homework and have weighed the risks then don’t let impermanent loss put you off. It’s a buzz word that gets stigmatised against liquidity pools without any real thought process. Think for yourself and do what YOU think is right.

If you need any extra help with this topic feel free to ask! 😊

I‘d exactly only invest in LP with one asset being a stablecoin. If you think a coin will pump then you should not invest in a LP due to IL. If you think the prices slightly increases stays the same or will fall then invest in a LP. farm the LP token and reinvest. Or to make it easier, just put the LP token in an autocompounder vault. LP investments are long-term.

Hello guys I have been yield farming in the avax platform for quite some time now and I want to know if there's a way to avoid impermanent loss, I'm not really loosing a lot of profit but it would be fun to find a way to avoid it ;)

I'm new to Liquidity Mining and I'm hearing this term over and over again. I still don't fully understand it; what is impermanent loss?

Match up two coins you expect to both rise. I'd avoid anything paired with a stable

In essence: If you provide liquidity to a liquidity pool (e.g. 50% ETH and 50% ADA) and one of the two assets (e.g. ADA) loses value (compared to the other) you will most likely have more of the worse performing asset in the pool (e.g. 30% ETH and 70% ADA)When you would have made more money just hodling them, you suffered from impermanent loss.

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I think this is the best article on how to avoid it:

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Long story short: use pairs which values are coupled to each other (e.g. two stable coins)

How have you learned to limit your losses and which strategies have you implemented to remain consistent and disciplined?

I was inspired by the "mental game" approach discussed by author and psychologist Jared Tendler who argues against the simplistic approach of just "fixing" things without first understanding the underlying complexities of our behaviors. I am sure others here would benefit by hearing the path to limiting losses from experienced traders.

I like that the top two pieces of advice here are "only ever do a pair with a stablecoin" and "never do any pair with a stablecoin"

I liked this explanation from binance academy:

Let's suppose that the two digital assets in the liquidity pool are ETH and DAI, and you deposit 1 ETH and 100 DAI.

This type of AMM (automated market maker) requires that the two deposited assets maintain a 1:1 ratio, which means that 1 ETH = 100 DAI.

Since 1 DAI = 1USD, your deposited assets are now valued at $200.

Now imagine that the total pool contains 10 ETH and 1,000 DAI, which is worth $2,000. This means you have a 10% share of the pool. The constant is k = 10 (ETH) * 1000 (DAI) = 10,000, which must always be equal before and after a transaction in the pool.

Suppose that the ETH price rises to 400 DAI. According to the AMM formula, the price of ETH in the pool is still 100 DAI. At this time, arbitrageurs can buy ETH at a lower price from the liquidity pool until the token price is back in line with the external price.

If we ignore the transaction fees, there will be 5 ETH and 2,000 DAI in the liquidity pool. At the same time, the constant k is still 10,000. If you decide to withdraw funds during this time, you can now withdraw 0.5 ETH and 200 DAI (10% of the pool), which equals $400 (excluding fees).

That doesn't seem so bad, but wait! If you would have HODLed rather than deposited these tokens, you would now have $500 worth of assets. So that's how you can lose $100 compared to just holding your tokens, and this is what we call impermanent loss.

Source:

This IL calculator was the only thing that helped me to understand it tbh. It allows you to enter the starting price of your assets, and a closing price. Then highlights the return you would get from just holding the asset, vs. return from providing liquidity for that pair.

I'd recommend playing around with some figures to get your head around it. And then hopefully come to the conclusion that you should avoid LPing for non-stablecoin pairs like the absolute plague.

It’s quite tricky actually, and the trading friction will kill you. I’ve studied LPing extensively and am convinced basically every LP position is underperforming.

Let’s discuss Uniswap v3 range staking, since it’s the most common model today, and it’s one that can be reasonably well hedged out (at a loss…)

Staking a very narrow, minimum-width range has basically the same P&L curve as writing a put with a strike price of your stake range. If the price goes up above your range, you get put dollars and have a flat but positive pnl for all the fees you collected. If the price goes down below your range, you get put coins that have a lower and lower value, and your PNL curve drops off to the left. It’s just like writing a put.

This means you can effectively hedge a narrow staking range by buying a put at the same strike price to eliminate your value risk.

But trading puts costs money. The cost of your trading fees and the spread on the put will be at least as big as the fees you make from the pool.

Then there’s the problem of having to move your staked range after the price goes outside of it. Moving a staked range turns your impermanent loss into a realized loss, plus you now have to sell your old put and buy a new one at the new strike price.

The trading friction will eat up everything.

GMX has the best balance algorithm. No need to try and hack it yourself.

Buddy, if you want some brilliant way to print money risk-free you're going to have to come up with it yourself. If you want modest guaranteed returns with minimal downside risk from blockchain assets it's called staking and lending.

Is it normally better to stake liquidity into a pool where the two tokens have a positive correlation?

How does impermanent loss affect a pool that is half stable coin?

Having a hard time thinking about this.

Thanks!

Assuming I created a SOL-USDC liquidity pair, is there a strategic way to minimize impermanent loss and maximise my gain while using a small range in liquidity pool assuming the price is rising in an uptrend. In order to earn the highest fee within a small range, is it best NOT to wait until it hits the upper range to rebalance it so that I can make sure I have plenty of SOL in the pool to capture the gain from the rising trend? And how would you balance between the fee you generated by using a small range and capturing the most gain using a wider range? Or is it a smart way to rebalance whenever I notice a significant change of trend from quiet market condition to bullish trend? What rebalance strategies do you use? Share your thoughts and comments!

If your non stable goes up you gain value. If it goes down you lose value. You can hedge by shorting the non stable but need to be wary about borrow costs vs income as well maintaining a delta neutral short. In a standard pool the more the non stable token increases the less there is of the non stable and the more there is of the stable token etc.

Impermanent loss isnt a big problem. The real problem is swapping for a shit coin to put into an LP just because it has a high APR. Then shitcoin tanks and IL is blamed when the problem was the shitcoin tanking as shitcoins do

Use single coin staking pools. That's the only way to avoid impermanent loss.