Bybit Arbitrage is a trading tool that simplifies arbitrage trading by capitalizing on funding rate and price differences.

If you're seeking consistent returns with minimal risk, Bybit Arbitrage is the perfect ally.

 This robust tool empowers you to generate regular profits with minimal risks by capitalizing on price disparities across different markets. Its user-friendly interface lets you easily spot and exploit these differences, so that you can execute flawless arbitrage trading in the crypto market with confidence. Read on to learn how Bybit Arbitrage makes arbitrage trading an effortless way for you to achieve low-risk gains.

 is the buying and selling of the same or similar asset(s) at the same time across different markets to earn from slight price deviations. This act of purchasing an asset at a fixed price — while simultaneously selling it at a higher price — allows a trader to instantly make profits without any risks. 

While arbitrage trading has long been a staple in traditional financial markets, such as stock and forex, the advent of crypto trading has propelled arbitrage trading to new heights — thanks to the heightened volatility of the crypto market. Additionally, unlike traditional stock markets, crypto markets are traded 24/7, offering more opportunities for arbitrage traders to reap profits from the price gaps across exchanges and markets. 

 across exchanges or within a single exchange. Keep in mind that if you opt to arbitrage trade across different platforms, accessing your profits may prove to be complex, due to the need to transfer your assets between the exchanges, which can take up to several days to complete. On the other hand, arbitrage trading on a single platform is more straightforward — but more competitive as well.

There are multiple arbitrage trading strategies, but the most common ones in the crypto market include funding rates arbitrage, spot-futures arbitrage and futures arbitrage. 

Funding rates arbitrage allows traders to profit from variations in funding rates between 

 contracts. In contrast, spot-futures arbitrage enables traders to profit from price disparities between the spot and 

 for the same asset. Meanwhile, futures arbitrage involves profiting from price discrepancies between futures contracts with different expiration dates.

Bybit Arbitrage is a trading tool that helps traders identify arbitrage trading opportunities in two ways: funding rate and spread. 

The user-friendly interface organizes trading pairs based on either funding rates or spreads in different markets, so that traders can easily spot disparities in funding rate or price across the markets at a glance. 

Bybit Arbitrage is exclusively available to 

 mode. It facilitates arbitrage trading for USDT Perpetual, USDC Perpetual and USDC Futures contracts, thereby allowing you to enjoy arbitrage trading opportunities between USDT 

Spot pairs and USDT Perpetual pairs, or USDC Spot pairs and USDC Perpetual/Futures pairs. 

The Funding Rate Arbitrage feature exploits differences in funding rates between the Spot and Perpetual/Futures markets on the Bybit exchange. With the Funding Rate feature, traders can earn funding fees while simultaneously managing their positions in order to minimize potential losses and maximize gains through positive and negative arbitrage strategies.

Funding rates for the different trading pairs are listed in descending order. This helps traders to easily leverage the interest rate differential between Spot and Perpetual/Futures contracts.

The Funding Rate feature also allows you to 

 orders (with the same amount, but in different directions) in both Spot and Perpetual/Futures, which enables you to earn funding fees while mitigating potential losses (with potential gains).

holders in Futures/Perpetual contracts pay short position holders. You can leverage this situation by executing a positive arbitrage, which involves

 buying a Spot pair and taking a short position in 

Perpetual to earn steady funding fees. Alternatively, if the funding fee is negative, short position holders pay long position holders. In this case, you would perform a negative arbitrage by shorting a Spot pair and going long in a 

The Spread Arbitrage feature helps traders capitalize on price discrepancies between different markets for the same cryptocurrency asset. With this feature, you can easily compare the market prices of an asset traded across various trading pairs and contracts. While Spread Arbitrage may be similar to spot-futures arbitrage, it offers more arbitrage opportunities since it covers a broader range of markets, unlike spot-futures arbitrage, which targets specific markets

With Spread Arbitrage, the aim is to profit from the eventual price convergence as you buy the crypto asset at a lower price in one market (e.g., Spot) and sell it at a higher price in another market (e.g., Futures). 

As the futures price will eventually align with the Spot price when the contract expires, you’ll be able to take advantage of the simultaneous price disparity for the same asset.

In order to trade with Bybit Arbitrage, you’ll first need to 

. Currently, Bybit Arbitrage is exclusively accessible via the 

 for the web version, which will be launched soon!

Bybit Arbitrage offers multiple advantages.

Bybit Arbitrage is a powerful tool for traders seeking low-risk gains in the volatile crypto market. With its intuitive interface and exclusive features, traders can effectively leverage funding rate and price differences to maximize profits while minimizing risks. Bybit Arbitrage offers diverse benefits that make arbitrage trading more accessible and profitable than ever before.

Beginner

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How to Use Bybit Arbitrage to Achieve Funding Rate and Price Difference Arbitrage

An Ethereum Spot ETF is an exchange-traded fund that tracks the real-time price of Ether and allows investment through traditional stock markets. Learn more.

Earlier this year, the U.S. Securities and Exchange Commission (SEC) gave the green light to a number of Bitcoin Spot exchange-traded funds (

), sparking optimism that similar approval might be extended to Ethereum Spot ETFs. Adding to the excitement, news of Ethereum Spot ETF approval in Asia’s first region has heightened anticipation for a potential approval and launch in the U.S. However, despite the buzz, some industry observers remain skeptical. This article explores the potential impact of Ethereum Spot ETF approval on the broader crypto market.

An Ethereum Spot ETF is an exchange-traded fund that tracks the real-time price of 

 and allows investment through traditional stock markets. It offers investors a way to invest in Ether without having to actually buy or hold the asset itself.

An Ethereum Spot ETF operates by pooling investor funds to purchase Ether, which is held in reserves by the ETF.

Rather than navigating the complexities of 

 and exchanges, investors buy shares of the ETF through regular brokerage accounts, just as they would with traditional stocks. These shares represent a stake in the Ether held by the ETF, providing a simple and regulated way to own Ethereum indirectly.

In order to create ETF shares, authorized participants — usually financial institutions — purchase Ether in exchange for ETF shares of equal value, which are then sold onto the market. An authorized participant can also redeem shares by buying enough ETF shares and exchanging them for Spot Ether and taking those shares away from the market.

As a result, the price of ETF shares tends to fluctuate in line with Ethereum's Spot market price. If it didn’t, there would be an 

 opportunity to profit from any mispricings in the ETF price. However, it’s still theoretically possible for the ETF to trade at different prices simply because of supply-and-demand factors.

ETFs as securities are regulated by the SEC, so an Ethereum Spot ETF provides a regulated product that investors can purchase. By contrast, Spot Ether is being investigated by the SEC to determine whether it should be classified as a security, and currently lacks regulatory clarity. 

This setup offers numerous benefits for investors. It simplifies the investment process, allowing anyone with a brokerage account to invest in Ethereum without setting up a crypto exchange account or managing storage. This can save time and give some investors greater peace of mind. An ETF structure also provides the regulatory clarity that institutional investors need, which can enhance liquidity and trading volumes.

Security is paramount in the realm of cryptocurrency, and the ETF provider takes it seriously. To safeguard Ether holdings, ETF providers employ a combination of 

 and insured custodial services. As a result, they could potentially minimize the risk of theft or loss that individual crypto investors may encounter.

The Ethereum Spot ETF bridges traditional finance (TradFi) and the exciting (but still growing) cryptocurrency space. It offers the security and ease of trading associated with traditional financial markets while opening up investment opportunities in Ethereum for a broader audience.

Both excitement and regulatory scrutiny characterize the current landscape of Ethereum Spot ETFs. Major financial institutions like 

 and Fidelity have submitted applications for these ETFs to the SEC. Still, decisions have been delayed, with the next 

If applicants begin updating their filings by April, this may indicate they’re incorporating feedback from the regulator, which could be interpreted as a positive sign. However, a lack of updates to filings could indicate that the SEC isn’t maintaining the same level of discussions with issuers that led to its 

Another challenge is that the SEC is still investigating whether Ether should be classified as a security, especially since it transferred its consensus mechanism to 

. Earning rewards through staking could meet criteria that determine whether an asset is a security. Ethereum also provides a foundation for 

 (DeFi), which could add to the complexity of the review. 

Analysts' opinions vary regarding the likelihood of ETH ETF approval. One Bloomberg analyst, for instance, 

 chance of approval by May. However, the SEC's recent silence might hint at a less favorable outcome.

The approval of Ethereum Spot ETFs is eagerly awaited because it could mirror the impact of Bitcoin Spot ETF approval, which led to an influx of capital in the market. It would mark a pivotal milestone, likely to attract increased investment and further validate cryptocurrency. The crypto community is closely monitoring these developments, as the coming months will be crucial in shaping the future of Ethereum investment opportunities.

 was recently given to the first Spot Bitcoin and Ethereum ETFs in one of the Asian regions. This landmark decision positions the city as a trailblazer in the Asian financial landscape, embracing the integration of popular cryptocurrencies into mainstream investment avenues.

This milestone has sparked excitement within the crypto community, indicating a positive reception toward digital assets in that region. Analysts believe this move could set a precedent for other jurisdictions to follow, potentially leading to broader acceptance and recognition of cryptocurrencies as a legitimate asset class.

These newly approved ETFs are expected to attract a wave of fresh investors — both retail and institutional — by offering a regulated and familiar investment option for exposure to cryptocurrencies. This growth of interest could increase stability in the crypto markets, possibly influencing the price movements of Bitcoin and Ethereum in the region.

The timing of this approval is noteworthy, considering that the U.S. could also be on the cusp of approval of an Ethereum Spot ETF. If this proactive approach inspires other financial centers beyond the U.S. to consider similar approvals, it will palpably contribute to the global expansion and maturation of the cryptocurrency market.

Current Impact of Ethereum Spot ETF Applications on the Crypto Market

The buzz surrounding Ethereum Spot ETF applications is noticeably affecting the crypto market, particularly Ethereum's price and overall sentiment. Submission of new ETF applications to the SEC has coincided with an 

, pushing it to around $3,700. This uptick reflects the market's optimism and positive sentiment regarding the potential for easier access to Ethereum. However, the market has exhibited some volatility as well, with Ether dropping over 14% in a week in early April. 

Despite these fluctuations, there's a general expectation that ETF developments would significantly impact Ethereum's price dynamics, similar to what was observed with the recent Bitcoin Spot ETF approvals. Moreover, the recent approval of cryptocurrency ETFs has further fueled optimism and positive expectations for increased investment inflows and a broader recognition of cryptocurrencies.

To sum up, the current impact of Ethereum Spot ETF applications on the crypto market is marked by heightened anticipation along with some volatility. Ethereum's price is responding to changes in the regulatory landscape and the potential for broader adoption of cryptocurrency-based investment products.

What Will It Mean if an Ethereum Spot ETF Application Is Approved?

The approval of an Ethereum Spot ETF application by the SEC would mark a significant milestone for the cryptocurrency market, especially for Ethereum. Following are some of the potential benefits.

Drawing parallels to the earlier Bitcoin Spot ETF approvals, some pundits expect an initial surge in Ethereum's price following the expected announcement, reflecting renewed confidence and interest in Ether as an asset. Over the long term, Ethereum Spot ETFs could contribute to growth and stability, similar to the impact that Bitcoin Spot ETFs have had on BTC’s price.

However, there are key differences to consider. The SEC's cautious stance on Ethereum — notably because of its PoS consensus mechanism — could influence the approval process and subsequent market reactions. In addition, Ethereum's unique ecosystem, including its role in DeFi and 

, could lead to different market responses as compared to those following the Bitcoin Spot ETF approvals.

The potential approval of Ethereum Spot ETFs is a crucial turning point for the crypto market, promising easier access, increased investment and greater legitimacy. Although short-term price fluctuations may occur, the long-term effects could echo the positive growth recently witnessed with Bitcoin Spot ETFs, promoting a more mature investment environment for Ethereum.

Intermediate

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Ethereum Spot ETF Approval: Its Impact on Crypto Markets

Grayscale Investments has filed a registration statement on Form S-3 with the SEC to register shares of its Grayscale Ethereum Trust (ETHE) as part of efforts to uplist the trust to a spot Ethereum ETF on the NYSE Arca.

Daily Top Performer — Automata Network (ATA)

The SPX index is up 0.02%, investor focus on earnings and U.S. interest rates continues. The broader cryptocurrency market is down, with Bitcoin and Ether dropping by 3.78% and 2.41%, respectively in the past 24 hours.

Today’s outperformer is ATA, which jumped 8.9% after Automata launched Multi-Prover AVS on Eigenlayer Holesky Testnet to boost decentralized security.

Automata Network (ATA), founded in 2019, is a Web3 platform providing private web services for decentralized applications, focusing on secure, anonymous transactions and governance. Key features include a private voting system and MEV minimization to enhance user privacy and security. Automata's Multi-Prover AVS, which utilizes TEE Coprocessors to enhance security, is now available on the Eigenlayer Holesky testnet. This system employs the TEE Prover as a secondary security measure in decentralized systems. Operators, restakers, and developers are encouraged to learn more about this advancement on their website.

Check Out the Latest Prices, Charts, and Data of 

Grayscale Investments, the world's largest crypto asset manager, has filed a registration statement on Form S-3 with the SEC to register shares of its Grayscale Ethereum Trust (ETHE) as part of efforts to uplist the trust to a spot Ethereum ETF on the NYSE Arca. This filing follows NYSE Arca’s application and is a crucial step in the regulatory process required for offering shares continuously upon approval. The shares will not be sold until the registration is declared effective, and this offering is subject to the Securities Act of 1933. Grayscale emphasizes that the trust, not registered under the 1940 Act, involves high risk and volatility, is focused solely on Ethereum, and does not offer direct investment in Ethereum.

BlackRock's spot bitcoin ETF, IBIT, has significantly impacted the firm's overall ETF flows, comprising 24% of its total. Eric Balchunas, Bloomberg's Senior ETF Analyst, highlighted the fund's success during a panel on Hong Kong's newly approved spot crypto ETFs. Since its launch in January, IBIT has attracted consistent inflows for over 70 days, accumulating more than $18 billion in assets under management and becoming one of the most successful ETFs in history. The IBIT fund is second only to Grayscale's ETF in terms of assets but has seen remarkable trading volume along with other spot bitcoin ETFs, totaling nearly $230 billion.

Gamium, supported by Parachain Ventures, DAO Maker, and Mr. Beast among others, has its token $GMM listed on major exchanges with a fully diluted valuation of around $43M. The platform is promoting a beta points airdrop to reward early users, where participants can sign up and earn points through various activities like launching an MST, trading, daily logins, and referrals. Details on point earning and distribution are available in a dedicated blog post. However, potential users are cautioned to research due to the inherent risks associated with DeFi protocols and trading.

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Grayscale Files for SEC Registration to Convert Ethereum Trust into a Spot ETF on NYSE Arca

Sharky is a Solana-based lending and borrowing DeFi solution that utilizes NFTs as loan collateral.

Cryptocurrency lending and borrowing has always been a prominent niche of the decentralized finance (

) industry, championed by platforms like Aave (

). A much rarer variant of DeFi borrowing and lending is based on non-fungible tokens (

Sharky.fi, or simply Sharky, is a Solana-based lending and borrowing protocol that uses NFTs as collateral to facilitate the DeFi processes on the network. By putting up NFTs as collateral, users can borrow funds via short-term loans in Solana's native SOL tokens. For lenders, the platform is also a great way to earn high APY rates in just 7 to 14 days, while having their loaned funds protected by the NFTs.

Having established itself as the leader of NFT-based lending and borrowing on Solana, the Sharky project has ambitious plans to integrate two more highly popular crypto asset types — Ordinals and real-world assets (RWAs).

 (SHARK) is a lending and borrowing app on the 

 (SOL) blockchain that lets users provide NFTs as collateral to access short-term loans in SOL tokens.

 Lenders can view NFTs offered as collateral, and make loan offers secured by their preferred NFTs.

Although Sharky's public launch on the Solana mainnet dates back to April 2022, the platform operated without its 

, SHARK, for its first two years in the market. The SHARK token was eventually launched in mid-April 2024.

Using its innovative business concept, Sharky quickly established itself as the leader of NFT lending. According to the project’s team, Sharky has a 90% share of the NFT lending market on Solana and has issued more than 1.4 million NFT loans.

Following the recent launch of its SHARK token, the project aims to integrate additional crypto asset types in the future. These include 

 (RWAs). Another ambitious product type considered for future implementation on the platform is uncollateralized consumer loans.

As a lender on Sharky.fi, you can browse NFTs from a variety of collections offered on the platform and make a loan offer for potential borrowers. The collections available on Sharky include the platform's own 

 collection, Mad Labs, Solana Monkey Business (SMB), Tensorians, Namaste and more. Lenders’ offers are shown to potential borrowers on the platform, who then choose the best offer based on their borrowing needs.

The NFT provided by the borrower is used as collateral, and the lender makes their funds available in SOL tokens. Lenders earn interest on the funds, with the loan duration typically between 7 and 14 days. Interest rates, naturally, will vary depending upon on-platform activity. Usually, 

 for active loans range between 120% and 220%, though they can go up to 360%. As such, Sharky loans are an excellent way for lenders to earn some serious interest quickly. If a borrower fails to repay the loan in full, the NFT used as collateral is transferred to the lender.

For borrowers, the Sharky platform is an excellent opportunity to access SOL funds for short-term needs quickly and flexibly using their NFTs, rather than cryptocurrency, as collateral. The best part of the platform's borrowing mechanism is that you remain in possession of your NFT during the loan period as a borrower. While your NFT is used as collateral, its ownership isn't transferred to the lender while the loan is active. The ownership transfer may only happen at the end of the loan period if you fail to repay the loan in full.

Maintaining the ownership of your NFT allows you to keep using it on various DeFi and other apps for purposes such as staking or satisfying 

 eligibility requirements, among other potential uses.

Sharx is the platform's own NFT collection. One of the most popular collections used in Sharky's lending and borrowing operations, sharx is made up of 10,111 adorable shark characters. Purchasing a sharx NFT not only opens up borrowing opportunities but also entitles you to upgrade or boost your Chowder points, rewards that are used in Sharky's loyalty program. 

As a sharx holder, you're entitled to the airdrop of Sharky.fi’s governance token, SHARK, and you can also stake sharx to earn FISHY tokens.

The newly launched SHARK token is envisioned as the platform's governance asset, with a total supply of 100 million. As of the time of writing in late April 2024, only some specific details on the actual governance processes powered by SHARK are available. Thus, the token's actual use in on-platform governance is expected to be outlined in the future.

SHARK will be airdropped in two phases, with 4.25% set aside for the first phase and 3.5% for the second. Of the former, 70% is allocated to its community, with the remaining 30% is distributed to partner communities. Meanwhile, the second phase is held as a staking pool event with a lockup duration of 30 to 60 days exclusively for OG, new users and sharx holders.

 of Sharky. Unlike the brand-new SHARK token, FISHY was issued back in 2022 at the start of the platform's operations. FISHY can be earned by staking sharx NFTs, accumulating reward points and participating in Sharky's social media campaigns. The token can be used to boost sharx NFTs, which in turn can earn you additional Chowder points. FISHY also gives you access to NFT raffles and auctions held on Sharky.

The SHARK token can be bought on Bybit through a Spot pair with USDT (

). Additionally, you can also take part in Bybit's current campaigns for the token for the chance to grab a share of the 

, which includes a Token Splash event featuring 456,000 SHARK through Apr 30, 2024, 9AM UTC, and a Lucky Draw with 58,000 SHARK in rewards through Apr 30, 2024, 9:59AM UTC.

Lending and borrowing using NFTs as collateral is a novel concept that has earned Sharky leadership positions in this niche. As more platforms adopting this business model emerge, the competition in the field is likely to intensify. However, as of now, Sharky remains the absolute leader of the Solana-based NFT lending and borrowing market. 

As NFTs experience a resurgence in popularity following the post-2021 dip, DeFi solutions that make innovative use of these assets, such as Sharky, stand to benefit. Later in 2024 and beyond, we’ll likely hear more about NFTs being used as legitimate collateral in crypto finance — a new trend helped to no small degree by the Sharky platform.

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Sharky.fi (SHARK): The Decentralized Platform for Instant NFT Loans

Blockchain

DeFi

An impermanent loss will only incur on paper and only becomes realized once it's withdrawn from the liquidity pool. Learn how it works.

 (DeFi) is liquidity mining, which is how users place their cryptocurrencies into liquidity pools on 

 (LPs) earn rewards for increasing the liquidity available in these DEXs for market participants to swap.

These AMM DEXs utilize algorithms that drive the token rebalancing formula for the pools, allowing for sustainable swapping. However, using such algorithms result in divergence between the new price of the cryptocurrency in the liquidity pool and the original price at which LPs have deposited it. This difference in price is known as impermanent loss, and becomes greater when the change in price is larger.

In this guide, we’ll discuss impermanent loss, the pros and cons involved in providing liquidity, and how you can avoid or minimize your level of impermanent loss.

Liquidity Pools and Automated Market Makers (AMMs)

In order to understand how impermanent loss works, it’s vital to be familiar with AMMs and liquidity pools.

DEXs were developed to enable token exchanges that don’t need to use a reliable intermediary. Assets never leave users’ wallets, and are never in the possession of the exchange, unlike when using a centralized exchange (CEX). DEXs preserve decentralization through AMM algorithms and liquidity pools, two blockchain-based inventions.

Understanding Automated Market Makers (AMMs)

Traditional order book models depend upon the matching of buyers and sellers in order to carry out transactions. When you use an AMM DEX, you’re trading against pools of tokens instead of other traders, with the liquidity in the pool provided by LPs. Although liquidity pools can be made up of multiple tokens, they are usually just made up of two pools of tokens. The ratio of tokens available within these pools is controlled by the following algorithm:

 represent the value of each type of token in the pool. 

 is the fixed constant that keeps the total liquidity of the pool constant.

According to this formula, the total value of each liquidity pool are always equal to each other. The fixed constant creates an automatic pricing mechanism  that maintains the equal value of each token pair.

A liquidity pool (LP) usually comprises two tokens, known as a pair. For instance, DAI and ETH form a pair. The weightage of both cryptocurrencies is equal in value to make it simpler for users to conduct trading. The number of tokens can be different in each pool but the total value of each pool must equal each other. For example, in terms of dollar value, the ratio will be 50% DAI and 50% ETH in this pool.

Liquidity pools are essentially smart contract–enforced deposits of two tokens needed to enable swaps on a DEX.

, there’s a constant formula-based algorithm that ensures the values of the two cryptocurrencies remain the same. Moreover, the algorithm allows liquidity to be provided, no matter the trade’s magnitude.

 increasing a token’s price as its desired quantity rises. As a result, the price of a token in a liquidity pool is dictated by the proportion of that currency.

For example, when you purchase DAI from an ETH/DAI pool using ETH, you are essentially reducing the supply of DAI in the pool. At the same time, the supply of ETH increases as you add ETH to the ETH/DAI pool. In such a situation, the quantity of ETH increases and DAI decreases, which results in each ETH being worth less DAI. 

Since these pools offer a better trading experience, some systems have begun to incentivize liquidity providers with additional tokens to provide liquidity to some pools. This process is more commonly called liquidity mining.

When you deposit into a liquidity pool and the price of the tokens change compared to when you deposit them, this is referred to as impermanent loss. 

Another way to look at impermanent loss is when you provide liquidity by depositing two cryptocurrencies in a liquidity pool, and make a profit that’s less than what you would have made by simply holding the two cryptocurrencies. It occurs when a cryptocurrency’s market price shifts, depreciating the value of the cryptocurrency you deposited in a liquidity pool below its current market value. The loss is even greater with a greater price change.

Impermanent loss can be negated if the token price reverts to its previous value, making the loss "impermanent", or “temporary”. It's also critical to remember that this loss does not account for trading fees that investors receive in exchange for supplying liquidity, which can cancel out losses.

If investors remove their cryptocurrencies from the pool, the impermanent loss becomes realized. In order to make up for this loss, pools have trading fees that go to liquidity providers to hopefully make up for their impermanent loss.

Which Pools Are Prone to Impermanent Loss?

Some pools are more prone to impermanent loss than others. Typically, these pools contain volatile cryptocurrencies. If the price of a cryptocurrency has been volatile for a while, it makes for a risky cryptocurrency pair, since price fluctuations will likely result in impermanent loss.

Likewise, a pool with cryptocurrencies that are correlated, such as a liquidity pool consisting of ETH and cryptocurrency correlated to ETH such as frxETH, or USDT and USDC that are both correlated to the USD, will have no impermanent loss as prices move in tandem with each other. 

You can take some precautions, discussed further in this article, in order to avoid impermanent loss.

How Does Impermanent Loss Happen in DeFi?

Let’s use an example: As a liquidity provider, Jack stakes 1 ETH and 100 USDT. According to the AMM concept, the staked tokens need to be of equivalent value. Thus, Jack’s 1 ETH would be equal in value to 100 USDT. At that moment, Jack’s stakes translate to 10% of the total of 10 ETH and 1,000 USDT in the liquidity pool.

One week later, the price of 1 ETH is equivalent to 400 USDT. Thus, the pool is now imbalanced as 10 ETH is worth 4,000 USDT but the pool is paired with only 1,000 USDT. 

Arbitrageurs will quickly spot this pricing inefficiency in this pool and buy up ETH from the pool with USDT, removing ETH and adding USDT, until the total value of ETH in the pool is equal to the total value of USDT in the pool, also known as rebalancing the pool. In this case, arbitrageurs will rebalance the pool until there is 5 ETH and 2,000 USDT left, as 5 ETH at 400 USDT is equal to 2,000 USDT. 

To know if Jack will suffer an impermanent loss or profit from his stakes, he’ll have to withdraw 10% of his share from the liquidity pool of 0.5 ETH and 200 USDT, which amounts to $400:

200 USDT + $200 = $400. However, Jack would have made $500 if he’d held onto his ETH and USDT because 1 ETH has increased in value to $400.

By providing liquidity in an AMM, Jack’s gains are 50% less than they would have been if he’d held his cryptocurrencies. 

This loss is called “impermanent” because it is not realized before the LP position is withdrawn. Also, if ETH’s value returns to 100 USDT in the above example, the loss will be reversed. Therefore, it’s an 

 loss that changes with the dynamism in the market.

As discussed above, liquidity providers don’t always experience a monetary setback because of impermanent loss. However, it can happen in some cases, such as the example below.

Suppose you have $500 worth of two cryptocurrencies. We’ll use UNI and ETH for this example. Let’s assume you have 150 UNI and 1 ETH, that 1 ETH is worth 150 UNI, and that the total value of each is $500. However, once you deposit both the currencies in the pool, the ratio will differ, since the currencies will fluctuate in terms of price as trades occur in the market.

, you might have more UNI or more ETH in the pool. So, what happens when the rate differs from the time you deposited both the currencies? You’ll suffer from impermanent loss once your cryptocurrencies are withdrawn from the liquidity pool. 

Keep in mind that the rates have changed since you first deposited the currencies. Therefore, when you withdraw them, you may have more of one currency and less of the other — or vice versa.

What if you’d just held your assets and hadn’t provided them as liquidity? You would have more of both currencies, which would translate to a higher value.

For an advanced impermanent loss calculation with formula, 

By becoming an LP and providing liquidity to AMM DEXs, you receive rewards in the form of platform trading fees. With increased trading activity and higher volatility, the rewards earned by LPs also increases. Hence, with sufficient trading volume on the platform, it’s likely that the accumulated fees earned by LPs will be able to cover their impermanent losses, making the liquidity provision profitable.

More recently, AMM DEXs have also begun to reward LPs with their governance tokens. Examples include UNI, CRV and BAL. Such tokens can either be utilized elsewhere in the DeFi ecosystem or traded on exchanges for a profit.

However, the profitability of being an LP is highly dependent on the time and pool you choose to provide liquidity to. Picking a pool with high trading activity fueled by market conditions is often profitable for LPs.

The most prominent disadvantage of liquidity pools is impermanent loss, because it can occur regardless of the direction in which the market moves.

In some cases, if the market is volatile an impermanent loss is inevitable, since prices are bound to fluctuate. However, you can take some steps to make sure you avoid impermanent loss— or at least don’t suffer a heavier blow when prices move.

If you want to avoid impermanent loss altogether, you can consider providing liquidity to a stablecoin pair. For example, if you provide liquidity using USDT and USDC, there will be no risk of impermanent loss, since stablecoin prices are meant to be stable.

However, the major downside to this approach is that you won’t benefit from any rise in the market. If you’re liquidity mining in a bull market, there’s no point in holding stablecoins, because you won’t receive any returns on them.

However, if you’re liquidity mining in a bear market, try to provide liquidity with stablecoins and earn trading fees. This way, you’ll be profiting through trading fees without losing any money.

How to Avoid Impermanent Loss When Providing Liquidity in DeFi

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