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Contributing to a liquidity pool enables liquidity providers to earn passive income while also supporting the continued growth of decentralized finance (DeFi) platforms that they’re passionate about. However, such contributions expose these liquidity providers to impermanent loss, which can occur when a token’s price shifts.
Efforts to adequately address this risk for liquidity providers have largely fallen flat, and have even worsened the problem in some cases. SmarDex is the latest DeFi project that promises to solve the problem of impermanent loss, and potentially even transform it into impermanent gain.
In this article, we’ll discover how SmarDex works. Key Takeaways:
The risk of impermanent loss is significant for liquidity providers, and hasn’t been properly addressed until recently.
SmarDex uses an advanced algorithm that minimizes impermanent losses while allowing for impermanent gains in the DeFi space.
SmarDex charges lower trading fees than usual AMMs, and offers four services in its platform: Swapping, liquidity provision, farming and staking.
The concept of impermanent loss is particularly crucial for liquidity providers to understand, as they’ll likely face it when they provide tokens to a liquidity pool. While automated market makers (AMMs) facilitate faster trades, since trades can be executed immediately without a third-party intermediary, the automated nature of AMMs also creates impermanent loss. This is because prices are decided instantly, instead of going through an order book that determines the best prices for both parties.
When you deposit cryptocurrency assets into a liquidity pool, the price of your deposited assets can change. In fact, some altcoin prices fluctuate by up to 20% daily. The risk of price change is the impermanent loss that occurs. Impermanent loss only materializes when you reclaim the tokens you’ve deposited after the price change occurs. While the tokens are still in the pool, the loss is considered an unrealized loss.
Impermanent loss takes place whether the price increases or decreases. The amount of loss is based on how significant the price movement is. To determine impermanent loss, you compare the profit or loss you would have generated by HODLing your tokens to the profit or loss and trading fees for contributing to the liquidity pool.
Liquidity providers can attempt to mitigate losses by choosing stablecoins and wrapped tokens, which typically exhibit lower price volatility and reduce the risk of price changes. Alternatively, they can calculate risks to minimize losses. However, despite these strategies, the inherent risk of impermanent loss might dissuade some investors from participating in liquidity pools.
Some DeFi protocols have offered liquidity provider (LP) tokens to create more incentives for liquidity providers. But new LP tokens must be continually created, and this approach proves unsustainable in the long run as supply outstrips demand.
SmarDex is an automated market maker (AMM) that uses its advanced algorithms to reduce the risk of impermanent losses — and possibly even turn them into impermanent gains — by managing liquidity with a special algorithm so that it can offer swaps at the best prices. SmarDex operates on EVM-compatible blockchains like Ethereum, BNB Chain, Polygon and Arbitrum, thereby allowing users to swap ERC-20 tokens.
Many current decentralized exchange (DEX) platforms utilize outdated algorithms that make impermanent loss an unfortunately common aspect of contributing to liquidity pools. While the benefit of earning passive income as a liquidity provider is substantial, the risk of the tokens losing value due to a price change can potentially result in a net loss for investors.
SmarDex is designed with a specialized DeFi protocol called the fictive reserve, which uses a unique algorithm to enable an automatic balance in swap prices so that liquidity providers can earn more profits. It also offers competitive fees to elevate profits. SmarDex supports staking, farming, liquidity provision and swapping.
SmarDex has specifically been created to address the matter of impermanent loss for liquidity providers in the DeFi space. Other DEXs use the k constant rule, which means that liquidity provision involves swapping the original tokens with LP tokens. As the two tokens must maintain equivalent value, the price movement for the initial token results in impermanent loss when the investor withdraws funds from the pool.
Because impermanent loss creates an actual financial loss for investors (or minimizes gains as compared to holding the tokens), some investors are deterred from contributing to the pool and thus helping to maintain the liquidity of the platform.
The DeFi protocol used by SmarDex uses an adjusted k constant rule on a fictive reserve. Through this modification, an equilibrium between the tokens is established and maintained in such a way that impermanent loss is less likely, and impermanent gains are possible. Notably, the fictive reserve can also thwart malicious actors who want to generate unscrupulous gains while inflicting impermanent loss on other LP contributors.
Thanks to its advanced algorithms and services, SmarDex is a unique platform in the DeFi space. It offers investors the potential for greater returns by reducing the risk of impermanent loss and actually enabling the possibility of impermanent gain. Let’s look at the core services offered on SmarDex.
SmarDex's structure allows for lower trading fees of 0.07% (on the Ethereum blockchain), unlike the typical 0.3% fees of other AMMs. The trading fees collected are then distributed as farming yields and staking rewards.
When you select the Swap tab on the SmarDex main page, you’ll be able to choose from numerous ERC-20 tokens to swap, the most popular being ETH, WETH, USDT, WBTC and SmarDex's native token, SDEX. After choosing your preferred trading pair, you'll have to give permission to SmarDex for the swap to occur. As a DEX, SmarDex allows you to retain full control of the tokens being traded in your connected web3 wallet.
Users can contribute as liquidity providers to the security and functionality of SmarDex. The funds that you contribute to the liquidity pool will be used to facilitate AMM trades on SmarDex. When you deposit SDEX, you’ll receive an equivalent amount of LP tokens. Because SmarDex's fictive reserve automatically maintains the balance in reserves, the risk of impermanent loss is minimized. You can provide liquidity and manage your assets through the platform’s Liquidity tab.
When you deposit your LP tokens to SmarDex's farms (e.g., SDEX/WETH, SDEX/USDT, WBTC/WETH), you can earn more SDEX as a liquidity pool provider. On the SmarDex interface, you can click on the Farming tab to browse the available pairs. Then, click on the Stake LP buttonto apply your LP tokens to the initial liquidity pool. You can then monitor and manage your assets through the Farming dashboard.
Staking SDEX tokens generates passive income for the investor through additional tokens paid as staking rewards. You can quickly begin staking in the platform's Staking section by depositing your SDEX tokens from your connected wallet. In addition, you can check in periodically to monitor your returns and withdraw tokens as desired.
When you harvest some or all of your SDEX, you’re removing those assets from the Farm and will no longer receive passive income from them.
As the native ERC-20 token of the SmarDex platform, SDEX can be used to access all of the SmarDex services and features. Specifically, this token can be swapped, staked and added to a liquidity pool. Staking and farming both provide investors with a passive income stream from rewards, with a minimized risk of impermanent loss. A portion of each trading fee is paid as a reward to liquidity providers. A smaller share of trading fees that are collected is distributed as a staking reward.
The total supply of SDEX tokens is 10 billion, and the current circulating supply is over 6.7 billion. Half of these tokens are allocated to the liquidity pool for the SDEX/USDT pair. The liquidity pool has a withdrawal rate of 2.5% per week, and the remaining tokens are distributed with 37.5% to long-term farming and staking rewards and 12.5% to a four-week boost period for farming and staking rewards.
The farming yield will fluctuate over time, based on the number of distributed tokens in circulation and the year of distribution.
As of Aug 2, 2023, the price of SDEX is $0.01. It has a market cap of around $68.83 million, with a 24-hour trading volume of approximately $292,000. On Jul 23, 2023, SDEX experienced an all-time high of $0.01248. Its all-time low price was $0.0026 on May 17, 2023.
Several sources have predicted that the price of SDEX will increase over the next several years. DigitalCoinPrice, for example, anticipates the token’s price to be $0.037 in 2025 and $0.11 in 2030. PricePrediction projects the SDEX token price to be $0.032 in 2025 and $0.20 in 2030. While these predictions are generally optimistic, it’s impossible to accurately forecast a cryptocurrency's future price, particularly relatively new altcoins that tend to be more volatile. Hence, it helps to do your own research before investing in any altcoins.
SmarDex’s developers have ingeniously tackled the prominent problem of impermanent loss in the DeFi space. Their exceptional algorithm introduces a groundbreaking approach that addresses liquidity problems, and converts impermanent losses into impermanent gains. This remarkable solution positions SmarDex as a potentially leading DeFi platform for crypto investors to seriously consider.
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