What is impermanent loss?

So it was a bit complicated for me to understand at first. But after messing around with it, I think I have a fundamental understanding of the system.

When you provide liquidity to a pair, lets say (PRV - ETH), your basically buying into the liquidity pool. You receive shares equal to the percent ownership of the liquidity pool.

Since your providing 50% PRV and 50% ETH, the price that everything was when you bought into the liquidity pool is locked in place.
This obviously isn’t good if the price of ETH goes significantly up compared to the price of PRV. You would be losing money.

However, since your buying shares in the liquidity pool, when the price changes, and somebody else provides liquidity at a different rate, the price in the pool averages out. The more people providing liquidity, the more stable the price is.

So if you lose money, as long as more people provide liquidity and average the price back out, you should be fine. The liquidity pool is also gaining from staking PRV as well as transaction fees. This get’s rewarded to the liquidity providers based on the amount of shares owned. The longer you stay in, the more you get.

Obviously low liquidity pairs are more risky in this system, but they usually offer higher rewards to supplement that beginning gap. Non mainstream coins are gonna be harder to provide liquidity for, especially if their price fluctuates heavy.

This is personally why I believe implementing a 3rd party coin exchange into Incognito would be so beneficial. Instead of having a few really big liquidity pools, we could balance it out, to coins with lower liquidity. That would mean instead of providing liquidity for one individual coin, your providing liquidity to the whole network. I believe this approach would be better. However, I wouldn’t expect Incognito’s liquidity to be balanced between all coins, just the major ones. Maybe it could be a percentage based system, 80% of the liquidity distributed between BTC, XMR, ETH, USDC/T, DAI. Then 20% of the liquidity distributed between less traded coins.


Thank you, that was very clear. I will definitely avoid those low liquidity pairs.


Yes, I am with you and I want to see this work and I think that’s pretty close to the solution. Good stuff.


When will this be fixed? I have link staked for liquidity and want it out now.


Hey @Brakley what exactly do you mean? If you use Provide to supply liquidity you will not experience impermanent loss.


I started providing over a month ago. I thought that this would be fixed by now and I thought that I would be earning interest compounding on my contribution not based on the dollar value. Am I missing something? I originally provided 52.44 link and now it says my share is 35.7356 link. Why is this still the case?


Can you please help me figure this out? I’d like to know my funds are still available. Does the price off prv have to appreciate back to the ratio it was vs. the staked contribution in order to get back my original amount provided?


I experienced the same with USDT and KNC. Impacts more when liquidity levels are lower than others like BTC. Your LINk will increase with the more people that trade it for PRV. It does take awhile, some longer than others. Your PRV that is provided with it should have increased to almost, unfortunately, offset the LINk that is gone.


Yeah, I did the math but unfortunately it doesn’t equal the amount of LINK I am missing. I will just remain patient and wait it out. I guess it just helps me hodl longer lol.


It was alway around $1-2 less in my case. The USDT came to a few over what I had provided. The KNC did go back up but was I think 2 or 3 less than I put in. But it was a very small pool. 2 people and only like 46 KNC.


Hey @Brakley, I think you confuse pDEX and Provide (pDEX v2), which have different mechanisms. pDEX still may cause impermanent loss. You provide two sides. In your case, PRV and LINK.

However, Provide has guaranteed interest and supports some major coins (PRV, BTC, XMR, USDT, USDC, DAI). It does not support ETH, LINK, MATIC etc. yet.


Thanks, @abduraman for jumping in.

Yep @John_May @Brakley if you use ADD tool you will be able to provide liquidity to any pairs, but you will be experiencing impermanent loss.

If you do not want to experience it, please provide liquidity with Pool functionality.

I assume you are talking about a pair LINK <> PRV. And when some trades happened the balance was changed. You get less LINK, but you do not say anything about you get more PRV.

Basically to calculate your profitability, please use this formula

Initial liquidity value LINK + PRV = in USD
Current liquidity valued LINK + PRV = in USD

Your earnings = Current liquidity value - Initial liquidity value + LP rewards.

I hope it helped.

And yes, as @abduraman mentioned, we built Pool to make it easier.


What about removing the add pair option when the currency is available via the new pool and migrating automaticaly the pairs in the new pool?


So I am just losing the link I provided unless it crashes below prv value it was at the time I added the pair? I’d like to get what I provided back out.

Over a decent period of time, you would be able to gain back the link lost from Impermanent Losses. This is why it is important for users providing liquidity to understand impermanent loss. The loss is “temporary”, and over time it can be gained back. If you take your value out now, the loss is locked in. However, because of the reward decrease for providing, and how hard people got hit with losses, the Incognito team created Pool v2. There was a lot of hub bub about it in the forums. Providing liquidity never guaranteed you would be able to take the same amount out.

Pool v2 still uses the same system, however it is guaranteed that you are able to withdraw exactly the same amount you put in. Providers don’t get hit by Impermanent loss, instead I assume the applied rate gets changed. This is much safer for investors who want to supply liquidity to the platform. Currently only a few major coins are available in Pool v2 with more getting added consistently.


Do you have a time frame of when I can expect this to resolve itself? Will the implementation of the new provide feature affect the old providers like me? Is it possible to continue losing more if LINK keeps appreciating in value?

This was a feature of the old liquidity providing. Yes, there is a possibility to continue loosing more LINK. However, the price of PRV is increasing. The new provide only allows for specific cryptos and uses a different mechanism to handle Impermanent Loss.


That sucks. So would you suggest I pull it out and cut my losses? I feel like link is going to continue to outpace prv so I would only lose more and more if that is the case. Am I correct in this assumption?


Hey, well yes, your assumption is correct.

Yet you never really know how the market is going to move and you may just recover said loss, since the loss is only temporary.

That being said, if you explicitly looking to earn interest than the new Provide feature would be the way to go.


Yeah. That’s what I’m gonna do. Shouldn’t take too long to make it back I guess. Thanks for your input.