How MatrixETF Mitigates the Impact of Impermanent Loss on Liquidity Providers
MatrixETF launched its liquidity Pool on two chains (Ethereum and Solana) on November 22nd, 2021, with a value of over $400,000 (about 5.5M MDF). Following the successful completion of the first Liquidity Mining Program, the Secondary Liquidity Pool was recently announced.
The Secondary MatrixETF Liquidity Mining Program will run for one month, beginning at 8:00 a.m. on January 13, 2022, and ending on February 12, 2022.
The pool offers exciting and enticing rewards and has already piqued the interest of liquidity providers.
The provision of liquidity carries its own set of risks, the most serious of which is the risk of impermanent loss.
A temporary loss of funds that occurs when providing liquidity is referred to as an impermanent loss.
To put it simply, it is the difference between the value of holding an asset and the value of using the asset to provide liquidity.
Impermanent loss is most common in standard liquidity pools where one asset is more volatile than the other and a liquidity provider (LP) is required to provide both assets in the appropriate ratio.
Calculators for Temporary Loss
Impermanent loss necessitates some calculations, and to alleviate investors' concerns, several online calculators are available.
One example of an impermanent loss calculator is il.wtf.
For example, Ben deposits 1 ETH and 100 MDF in a liquidity pool, and the AMM requires that the deposited token pair be of equivalent value, such that the price of ETH at the time of deposit is 100 MDF.
Let us also assume that Ben's deposit was worth $200 USD at the time of deposit.
Furthermore, suppose there are 10 ETH and 1000 MDF in the pool – both funded by other LPs like Ben. So Ben owns 10% of the pool, and the total liquidity is $10,000. The price of assets in a pool is determined by the ratio of assets in the pool, so while liquidity in the pool remains constant (10,000), the ratio of assets in the pool changes.
If ETH is now 400 MDF, the pool now has 5 ETH and 2,000 MDF.
As a result, if Ben decides to withdraw his funds, he is entitled to a 10% share of the pool. As a result, he is able to withdraw 0.5 ETH and 200 MDF for a total of 400 USD.
Although he has profited from his deposit of $200 USD in tokens, what would have happened if he had simply held 1 ETH and 100 MDF? The total monetary value of these holdings has now reached $500 USD.
So, rather than depositing into the liquidity pool, Ben would have been better off HODLing.
This is known as an impermanent loss, and it becomes a permanent loss upon withdrawal.
The risk that LPs take in exchange for the percentage of gas fees they earn in liquidity pools is known as impermanent loss (IL).
If IL exceeds fees earned by a user when they withdraw, the user has lost money compared to simply holding their tokens outside the pool. Impermanent loss can result in significant losses (including a significant financial loss).
As a reward for providing liquidity, MatrixETF liquidity providers receive a percentage of gas fees. They are also rewarded with minted tokens and percentage APRs. This way, the rewards earned for providing liquidity can easily exceed the impermanent costs.
Secondary Liquidity Mining Program Benefits:
Everyday MatrixETF will distribute 15,000 MDF through Liquidity Mining to users who have provided LPs, which include MDF/USDT and MDI/USDT; Everyday MatrixETF will distribute 12,000 MDF through Staking to users who have staked MDF and MDI.
On Solana: Everyday MatrixETF will distribute 18,000 MDF through Liquidity Mining to users who have provided LPs, which include MDF/USDCMSI/USDC and SEI/USDC; Everyday MatrixETF will distribute 15,000 MDF through Staking to users who have staked MDFMSI and SEI.
MatrixETF's funds invest in high-quality blockchain and DeFi tokens.
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