


Impermanent loss (IL) is a loss of funds that a user will incur when they provide liquidity on Automated Market Making (AMM) exchanges. AMM’s utilize an algorithm and game theory to generate liquidity, in turn, creating IL through the arbitrage opportunities presented.
AMMs, DEXS and Impermanent Loss
As Decentralized Finance (DeFi) has experienced a continued boom in the past six months, we have seen a rise in decentralized exchanges (DEX), the largest of which being UniSwap, SushiSwap, and PancakeSwap. These DEX’s rely on automated market marking (AMM) technology, which uses an algorithm and game theory to create a working exchange-- “DEX.” AMM’s utilize liquidity pools to generate liquidity for specific pairs; this technology relies on arbitragers to govern the price, which introduces impermanent loss (IL), something that users will incur when providing liquidity to these protocols.
Before we jump into IL, last week’s installment of Cryptonomics covered Decentralized Exchanges in-depth. I highly suggest touching upon the subject to better understand Impermant Loss, especially for those who do not know how DEX’s operate.

What is Impermanent Loss (IL)
Impermanent loss is a loss of funds that a user will incur when they provide liquidity. The name impermanent stems from the fact that the loss is temporary and can be recovered if asset prices return to their original state, which often does not happen. This loss is calculated based on your deposited assets’ worth at the time of deposit versus each asset’s current value.
Liquidity providers must provide their assets in 1:1 ratio, 50/50 CAKE/BNB, for example. The AMM then uses this liquidity to facilitate transactions and arbitragers will ensure that the price reflects the “true” price among all exchanges. AMM technology relies on this arbitrage to maintain the correct price; on the other side of the arbitrage are the liquidity providers, selling or buying at a premium. This is most visible in high volatility pairs with low correlation as there is continuously an arbitrage opportunity that users will take advantage of. Impermanent loss is pertinent in traditional liquidity pools due to the arbitrage opportunity the AMM technology relies on.
IL example
So let’s use a BNB/CAKE pool, for example. Lets assume that BNB = $40 and CAKE = $0.50
Currently, if a user wants to provide liquidity 2BNB($80) worth of CAKE/BNB they would deposit 1 BNB and 80 CAKE as liquidity pools require a 1:1 ratio of assets.
This also means that one BNB is equivalent to 80 CAKE at the deposit time, resulting in a total deposit of $80. There is not only one user in this liquidity pool; for example, lets assume 1 BNB and 80 CAKE results in 1% of the total pool share, meaning the pool contains 100 BNB and 8000 CAKE. So what happens when the price changes?
Let’s say the price of CAKE begins rising on the Binance exchange to $1 per CAKE token; users will take advantage of this arbitrage opportunity buying CAKE from the AMM and selling it on Binance, causing liquidity providers IL through taking advantage of the temporary price discrepancy. The best way to understand this is that the CAKE ratio is changing in the pool; instead of the collection consisting of 100 BNB and 8000 CAKE, it now consists of 150 BNB and 4000 CAKE, as the ratio must remain 1:1. So what happened to our initial users share?
The user’s share is now 1.5 BNB and 40 CAKE, which equates to $100, but if this user held each asset individually, they would instead have $120. This is the impermanent loss in action, as arbitragers begin to buy CAKE with BNB, the pool shifts’ ratio, allowing the arbitragers to profit off the liquidity providers.
This same scenario will play out when the price of an asset decreases. As arbitragers take advantage of the price discrepancy, the liquidity providers will have more of the “weaker” token to balance the pool ratio.
Impermanent Loss Overview
Impermanent loss is bound to occur in all liquidity provision scenarios. The most common way of realizing the loss is through comparing the value of LPing vs. Holding each asset individually (HODLing). As previously mentioned, impermanent loss affects users equally whether the price goes up or down.
The following graph has been developed to display the effects of IL:

This graph shows IL based on price change without accounting LP incentives. The chart displays the following data:
a 1.25x price change results in a 0.6% loss relative to HODL
a 1.50x price change results in a 2.0% loss relative to HODL
a 1.75x price change results in a 3.8% loss relative to HODL
a 2x price change results in a 5.7% loss relative to HODL
a 3x price change results in a 13.4% loss relative to HODL
a 4x price change results in a 20.0% loss relative to HODL
a 5x price change results in a 25.5% loss relative to HODL
Overall, these figures are essential to keep in mind as they give liquidity providers an idea of how much they should be compensated while providing liquidity. If a user knows they will receive more in rewards than lost in IL, it is most likely a no-brainer to provide liquidity.
Why Provide Liquidity?

From a glance, it seems like it makes no sense for users to provide liquidity to AMM’s, but there is more. Impermanent loss has been factored in by these DEX’s, so they give liquidity providers incentives to combat this risk. Typical AMM’s allocate a .3% trading fee to liquidity providers, which allows LP’s to profit based on the transaction volume.
On top of this, most AMM’s offer additional rewards to liquidity providers by providing users with governance tokens. LP’s are heavily incentivized to provide liquidity between the transaction fees and governance rewards, making it worthwhile for specific pairs.
Correlation In a Bull Market

Typically the best assets to pair together are ones that have a high correlation and are not volatile. While it is hard to find un-volatile assets in the crypto-space, it is much easier to find correlated assets. This rings especially true in the bull market phase as crypto markets are highly auto-correlated.
Auto-correlation refers to the delayed correlation or copy, meaning cryptocurrencies will typically behave very similarly over time.
This brings us into an undiscussed power of liquidity providing. As price fluctuates and one asset outperforms another, you end up selling the more expensive asset for the "lagging" one. This acts as a portfolio that rebalances profits into the underperforming token. This rebalancing can be extremely powerful, considering how heavily correlated crypto assets are. If and when the other token “catches up”, it will have allowed the user to maximize the gains as the user caught both of the assets rallies.
We have a Dive Into DeFi article which specifically outlines these aspects of liquidity provision.
Stay SAFU
Overall, IL is a crucial concept that all liquidity providers must understand. It is inevitable and will be present in all liquidity pools, besides stablecoin pools with perfect correlation. IL is not a reason to avoid LPing; it is just a cost that comes with earning the additional rewards.
The key is weighing the opportunity costs of HODLing assets individually vs. LPing them to earn extra rewards at the expense of impermanent loss. If the liquidity rewards outweigh the IL potential, then why would a user not participate in liquidity provision? With every investment, that is the most challenging part, recognizing and understanding the most optimal investment.

I hope this article helps beginner and experienced users better understand the underlying risk of providing liquidity and impermanent loss. It isn’t a reason not to provide liquidity, but merely an investment aspect, which users will incur in nearly all LP situations.
Don’t forget to download the BSC News mobile application on iOS and Android to keep up with all the latest news for Binance Smart Chain and crypto!
This is a paid press release, BSC.News does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products, or other materials on this page. The project team has purchased this advertisement article for $1500. Readers should do their own research before taking any actions related to the company. BSC.News is not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods, or services mentioned in the press release.
This is a paid press release, BSC.News does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products, or other materials on this page. The project team has purchased this advertisement article for $2500. Readers should do their own research before taking any actions related to the company. BSC.News is not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods, or services mentioned in the press release.
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Time Running Out for BNB? Why Investors Are Moving from BNB to $NUGX

Investors are turning to NuggetRush (NUGX), a mining project offering a unique mining adventure game with potential rewards.
TLDR
- BNB faces potentially reduced investor sentiment following Binance Exchange’s links to money-laundering activities.
- Binance’s founder and former CEO, Changpeng Zhao, has already resigned.
- NuggetRush (NUGX) offers high entertainment and community collaboration in its mining adventure game.
Binance Exchange has been involved in money laundering scandals as of late, leading to the resignation of its founder as CEO. Analysts say the controversy would likely increase negative sentiment for BNB.
Disappointed BNB holders are now turning to NuggetRush (NUGX), a mining project whose ongoing presale has risen by 30%. NuggetRush (NUGX) offers various rewards, including the opportunity to win real gold.
Yet, can this make it the best option out of available new ICOs? Let’s discuss.
BNB November Gains Undone By Money Laundering Scandal
The bullishness in the crypto market in November increased investor sentiment for several networks. Like many top altcoins, BNB started November with a rally.
Yet, BNB’s investor sentiment dropped sharply following Binance’s controversial involvement in money laundering schemes. On November 28, Changpeng Zhao resigned as CEO of Binance due to negligent behavior toward money laundering activities.
BNB’s decline has undone all its November gains. At the start of November, BNB was trading at $228.00, By November 20, BNB had jumped by 11.24% to $253.64. BNB dropped $229.30 by December 2, a few days after Changpeng’s resignation.
Binance is among the most active exchanges, with a daily trading volume of over $50 billion. Still, the recent controversy around money laundering activities has reduced its social sentiment.
Many investors are pulling their funds off Binance, which has pushed its withdrawals over $1 billion. Analysts expect this trend to continue in the short term. This could worsen BNB’s prospects, dropping it by 15.8% to $213.45.
NuggetRush: Round 3 Growth Stuns P2E Experts.
NuggetRush is a mining game with strong potential to become one of the most popular NFT projects. The game features a mining rush, where players will mine rewards like gold. NuggetRush offers a challenging environment that features the day-to-day life of artisanal miners.
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The game will also reward players with in-game currency. Players can then invest this in-game currency into upgrading their player characters and machinery. This gives them higher value, which players can realize on NuggetRush's (NUGX) marketplace.
Finally, NuggetRush offers NFT staking, thus allowing players to earn money from holding their assets. This further increases earning opportunities for NuggetRush members.
NuggetRush's blockchain ICO has grown by 30% since its launch. In the first round of NUGX's presale, its value was $0.010.
By round three, NUGX's value had risen to $0.013, growing by 30%. The next round of NUGX's presale would boost its value by 15.3% to $ 0,018. Furthermore, NUGX will get listed when its value reaches $0.020.
Visit NuggetRush Presale Website
Disclaimer: This is a paid press release, BSC.News does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products, or other materials on this page. The project team has purchased this advertisement article for $275. Readers should do their own research before taking any actions related to the company. BSC.News is not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods, or services mentioned in the press release.
This is a paid press release, BSC.News does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products, or other materials on this page. The project team has purchased this advertisement article for $1500. Readers should do their own research before taking any actions related to the company. BSC.News is not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods, or services mentioned in the press release.
This is a paid press release, BSC.News does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products, or other materials on this page. The project team has purchased this advertisement article for $2500. Readers should do their own research before taking any actions related to the company. BSC.News is not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods, or services mentioned in the press release.
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