2025-08-30
In the field of decentralized finance (DeFi), users participate in liquidity mining by injecting assets into the liquidity pool to obtain transaction fees and token rewards, which seems to be a safe bet. However, the existence of Impermanent Loss may unknowingly shrink the asset value of liquidity providers. As a unique risk in the DeFi ecosystem, what exactly is Impermanent Loss? How does it occur? And how should it be dealt with?
Impermanent loss refers to the value of the asset portfolio held by the liquidity provider in the DeFi liquidity pool when the price of deposited cryptocurrency fluctuates greatly, compared to the value loss generated by directly holding these assets. Unlike permanent losses in traditional investments, impermanent losses are "reversible". If the cryptocurrency price returns to its initial state, the loss will disappear, hence the name "impermanent". Under the Automated Market Maker (AMM) mechanism, the liquidity pool maintains asset proportion balance through algorithms. When the price of one of the assets rises or falls, the smart contract will automatically adjust the number of assets in the pool, which may cause damage to the asset value of the liquidity provider.
The generation of impermanent losses stems from the interaction between the AMM algorithm and market price fluctuations. Taking the constant product formula (\ (x * y = k\)) as an example, assuming there are initially 10 tokens A and 100 tokens B in the liquidity pool, when the price of token A doubles, in order to maintain the\ (k\) value unchanged, the smart contract will automatically adjust the number of assets, reducing token A to about 7 and token B to about 140. At this time, if the liquidity provider withdraws the assets, the total value of its assets will be lost compared to directly holding tokens A and B. The more intense and prolonged the price fluctuations, the greater the degree of unpredictable losses. In addition, the price correlation of different assets will also affect unpredictable losses. Asset portfolios with large price fluctuations face higher risks of unpredictable losses. HashKey Exchange When providing users with DeFi liquidity mining services, it will emphasize the risk of unpredictable losses and help users evaluate investment decisions rationally.
Although it is difficult to completely avoid unpredictable losses, liquidity providers can reduce risks through some strategies. Firstly, choose asset portfolios with relatively stable prices, such as stablecoins paired with mainstream cryptocurrencies or assets with high correlation, to reduce losses caused by price fluctuations. Secondly, diversify investments and allocate funds to multiple liquidity pools to avoid excessive impact caused by price fluctuations of a single asset. In addition, closely monitor market dynamics and timely withdraw liquidity or adjust asset allocation when prices fluctuate sharply. HashKey Exchange is also continuously exploring risk hedging tools to help users better balance returns and risks when participating in DeFi liquidity mining. However, users need to understand that no strategy can completely eliminate unpredictable losses. When participating in DeFi liquidity provision, they should fully understand the risks and plan assets reasonably.
What is HashKey Exchange?
HashKey Exchange is one of the first regulated cryptocurrency exchanges in Hong Kong to obtain a license from the Securities and Futures Commission (SFC). It supports fiat currency deposits and trading in Hong Kong dollars (HKD) and US dollars (USD), offering users spot trading services for mainstream digital assets including Bitcoin (BTC), Ethereum (ETH), and Tether (USDT). The platform also provides OTC (over-the-counter) services to meet the needs of large-value asset transactions and fiat currency conversion, ensuring more flexible and private trading. To cater to the asset allocation needs of different investors, HashKey has launched the HashKey Earn channel, offering users fixed-term and demand financial products to achieve stable appreciation of crypto assets. The platform holds ISO 27001 and 27701 security certifications, employs a 98% cold wallet storage mechanism, and incorporates security measures such as two-factor authentication to provide users with a stable and reliable trading environment.
Download link: https://www.hashkey.com/en-US/download
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