Before I begin let me say I'm the first to break my own rules. Some of these pools have such great rewards to incentivize liquidity that I just can't help myself. That said, it's still usually a bad idea.
Why?
I don't think Einstein could work out the math on liquidity pools and I'm certainly no expert. If you've looked into them, you've no doubt heard the term impermanent loss and then banged your head against the wall trying to figure out what it really means.
I'm not going to mention that term again but I'm going to show you why its generally a bad idea to put your coins in a liquidity pool if if you think those coins are set to mooove.
Let's look at coinx.
coinx is an amazing coin I just made up and its definitely going to the moon.
coinx X opens a liquidity pool trading against Hive. For the sake of simplicity, let's say coinx and Hive are the exact same price.
When the liquidity pool gets set up there needs to be an exact dollar amount match between coinx and hive. This is going to be very easy since both coins are the same price.
Let's say then that to start the pool we add 1000 hive and 1000 coinx.
We started the pool and added everything in it so we now own 100% of the pool. Now, let's say someone comes in and decides coinx is going to soar so he trades 100 of his hive for 100 coinx from our pool.
That means if we look at the pool now, there are not 1000/1000 coinx/hive but theres 900 coinx to 1100 hive. And remember, you own the pool entirely. That means that while the coinx did just go up in value against hive in your pool, you now have 10% less of it.
So if you really believe a coin is going up, why would you provide liquidity for it?
Here's a real life example of my own.
Recently I bought 60k THGAMING tokens specifically to provide liquidity because the rewards are fantastic. The token is ripping higher so I figured I'd lose tokens in the pool so I bought an extra stash that I just staked and kept separate. Let's look at the pool I'm in right now after just a few weeks:
As you can see, if I withdrew my liquidity right now I wouldn't have 60k THGAMING but just 36809 THG. Even that incredibly generous 359 THGAMING I'm getting as a daily bonus isn't going to make up for that loss for quite some time.
Of course its not all bad as my hive balance has gone up by about 20 hive but the coin that's soaring is THGAMING. Hive is down. If I were looking back at the last few weeks and thinking about which of these two coins I would rather be in over this time, its definitely going to be THGAMING because I like money.
Now, if you know the risks, sometimes these pools can be extremely worth it. I am in several pools for all sorts of reasons that have paid off and personally I have many reasons I'm glad to be in the THGAMING pool with part of my bag.
But I see way too many token creators and platform owners lately pushing people to their liquidity pools and throwing in a generic DYOR without actually explaining this basic risk.
I also see people with no experience in liquidity pools who seem to believe a soaring token is the best token to provide liquidity for. Like providing liquidity is super charging your gains or something when its actually muting them in most cases.
So anyway, yeah, DYOR.
Posted Using LeoFinance Beta
