Does a Stablecoin-to-Stablecoin Pool Eliminate Impermanent Loss?
A stablecoin-to-stablecoin pool, like USDC/DAI, significantly minimizes impermanent loss but does not completely eliminate it. Impermanent loss is caused by price divergence.
Since stablecoins are pegged to the same value (usually 1 USD), their ratio should remain near 1:1. However, if one stablecoin de-pegs, even slightly, impermanent loss will occur, albeit typically much smaller than in volatile asset pairs.
Glossar
Stablecoin Pool
Reserves ⎊ This refers to the collection of stablecoins, often pegged to fiat currencies like USD, held within a liquidity pool to facilitate trading and yield generation, forming the base layer for many DeFi activities.
Stablecoin
Instrument ⎊ Stablecoin refers to a class of cryptocurrency designed to maintain a stable market value, typically pegged to a fiat currency, which is essential for collateralizing margin accounts and settling cash-settled options in the derivatives market.
Capital Efficiency
Leverage ⎊ Capital efficiency, within cryptocurrency and derivatives, fundamentally represents the maximization of risk-adjusted returns relative to capital at risk, a metric increasingly vital given regulatory constraints and market volatility.
Stablecoin Pools
Pool ⎊ Stablecoin Pools represent a concentrated liquidity provision mechanism within decentralized finance (DeFi), specifically designed to facilitate trading activities involving stablecoins.
Impermanent Loss
LiquidityRisk ⎊ Impermanent Loss quantifies the temporary divergence in value between holding assets in a decentralized liquidity pool versus simply holding those same assets in a non-interest-bearing wallet, resulting from price movements between the deposited pair.