How Do ‘Stablecoins’ Reduce Impermanent Loss?
Stablecoins reduce impermanent loss because their price is pegged to a stable asset, usually the US Dollar. When two stablecoins or a stablecoin and a pegged asset are paired in a pool, the price ratio is designed to remain near 1:1, minimizing the price divergence that causes impermanent loss.
Glossar
Impermanent Loss
Exposure ⎊ Impermanent loss, a risk inherent in automated market maker (AMM) protocols and liquidity provision, arises from price divergence between assets deposited and their subsequent value upon withdrawal.
Price Divergence
Phenomenon ⎊ Price Divergence is a market phenomenon where the price movement of a cryptocurrency asset deviates significantly from the movement of a related financial indicator, such as an on-chain metric, a technical oscillator, or the price of a derivative contract.
Stablecoins
Peg ⎊ Stablecoins represent a class of cryptocurrencies engineered to maintain a stable value relative to a specified asset, typically a fiat currency like the US dollar.
Price Ratio
Ratio ⎊ A price ratio is a quantitative metric used to compare the value of one asset relative to another.