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Risks associated with LP

PreviousLiquidity poolingNextImpermanent Loss Protection

Last updated 27 days ago

When providing liquidity on either THORChain or MayaChain, it's important to understand the associated risks:

  1. Liquidity Pooling Risks: On both THORChain and MayaChain, your deposit is balanced into a 50:50 ratio (RUNE or CACAO). This means you’re exposed to the price action of both assets in the pool, which carries the risk of impermanent loss.

  2. Impermanent Loss: This occurs when the price ratio between the two assets changes, affecting your overall return. If the price ratio of (RUNE) decreases, liquidity providers (LPs) might face negative APR, leading to losses. Conversely, if the ratio increases, LPs could see higher profits.

  3. Leverage Risk: Due to synthetic assets on THORChain, your liquidity position is leveraged based on the price ratio of (RUNE). This leverage can amplify both gains and losses.

  4. Security Risks: While THORChain implements numerous security measures to minimize hacking risks, no protocol is entirely immune to security threats.

For more information about liquidity pooling, check out these resources:

Impermanent Loss Protection (ILP) has been completely deprecated on THORChain. However, MayaChain still offers ILP and does not use synthetic assets.

Impermanet Loss

Impermanent loss (IL) happens when you , and the price of your deposited assets changes compared to when you deposited them. The bigger this change is, the more you are exposed to impermanent loss. In this case, the loss means less dollar value at the time of withdrawal than at the time of deposit.

Understanding THORChain Liquidity Providers
Being a Liquidity Provider on THORChain
Price Exposure vs. Impermanent Loss in Asymmetrical LPing
Under the Hood: Liquidity Pool APR
provide liquidity to a liquidity pool