How to Avoid Impermanent Loss
There are three ways to mitigate the risks associated with impermanent loss.
1. Use Stablecoins
The most straightforward way to avoid impermanent loss is to provide liquidity in stablecoin pools. For example, Curve is a well-known DEX hosting many stablecoin pools comprising USDC, USDT, DAI, and other tokens pegged to the US dollar.
Your rewards will be derived from trading fees here. However, you may lose great opportunities during bull runs since you are holding dollar-pegged crypto.
2. Only Provide Liquidity During Low Volatility
Another approach would be to hold fluctuating cryptocurrencies in liquidity pools for as long as they don’t show high volatility. If the price starts to change considerably, you can withdraw your funds after earning from trading fees. You can use stop-loss orders to close positions automatically. Bear in mind that joining liquidity pools can be expensive in high gas-fee environments. Also, when volatility is low, rewards are also low.
3. Multiple Asset Pools
Decentralized exchanges (DEXs) such as Balancer offer pools that can contain multiple tokens (up to eight), which can help mitigate the risk of impermanent loss. This is because the more diverse the pool’s assets, the less impact the price fluctuation of any single asset has on the overall value of the pool.
