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Polaris Defi
  • Polaris DeFi
  • 👋Welcome To Polaris
  • What is Polaris?
  • Decentralized Pool Creation
  • POLAR Token Utility
  • Polaris History
  • 👨‍💻 Beginners Guides
    • Setting up a wallet to buy Polar
    • Setting Up Metamask (BSC)
    • Setting Up Metamask (Polygon)
    • Liquidity Pool pricing mechanics
    • Providing liquidity to participate in Supernovas
    • Risk of Impermanent Losses
  • 🪐Polaris Supernovas
  • Introduction to Polaris Supernova Pools
  • Supernova Emission Mechanism
  • POLAR Multipliers
  • Projects: Deploying Your Own DIY Supernova Pool
  • Projects: Feature Your Pool
  • Supernova FAQ
  • 📄Tokenomics, Rewards and Roadmap
    • POLAR Tokenomics
    • POLAR Reward Distribution Schedule
    • Development Roadmap
  • 💡Misc
    • Contracts
    • Creative Assets & Media
    • Links and Resources
    • Disclaimer
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  1. 👨‍💻 Beginners Guides

Risk of Impermanent Losses

Liquidity farms provide high yield because liquidity providers are exposing themselves to price volatility risks by providing liquidity. Liquidity providers need to earn rewards to justify taking these risks.

Rewards are available in the form of sharing transaction fees. However this is not attractive enough to attract liquidity to new tokens with smaller liquidity pools. Therefore, Supernovas provide these rewards through liquidity yield farming.

Risk of Impermanent Losses

Price volatility can result in the liquidity provider taking Impermanent Losses. The losses are called "Impermanent" because the losses occur if the price moves up or down, but if the price then returns to the initial level then the losses are recouped. So its only a real loss if the liquidity is withdrawn at a different price level to when the liquidity was initially deposited.

If the price of the underlying tokens increased, then the liquidity provider may still have earned a profit, but the profit would have been less than if the tokens were not deposited into the liquidity pool.

As a rule of thumb, the following table shows the relationship between price volatility and Impermanent Losses:

  • Price increase of 2x underlying tokens result in 5.7% loss

  • Price increase of 5x result in in 25.5% loss

  • Price increase of 10x result in in 45.5% loss

The inverse is also true:

  • Price fall of 50% underlying tokens result in 5.7% loss

  • Price increase of 80% result in in 25.5% loss

  • Price increase of 90% result in in 45.5% loss

Note that these are cumulative, so 2x or 200% then 5.7% loss out of this increase, so net gain of 188.6%

These price volatilities are extreme, but crypto markets and tokens can and experience these extreme price changes.

These price swings can actually occur quite often, especially when the liquidity pool size is small.

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Last updated 3 years ago

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Binance Academy provide an excellent tutorial here

https://academy.binance.com/en/articles/impermanent-loss-explained