Risks of Providing Liquidity
IL Risk, Liquidity Risk, Smart Contract Risk
Last updated
IL Risk, Liquidity Risk, Smart Contract Risk
Last updated
If you've been active in DeFi, you've most likely heard the term Impermanent Loss (IL) before. IL occurs when the price of the tokens changes compared to the initial price at which they were deposited into the pool. The bigger the price change, the higher the impermanent loss. Pools with more volatility have more IL risk than pools with stable assets (more of a price change between the two assets). In GammaSwap, the IL risk is the same for all liquidity providers and is - the same as UniV2.
Here are examples of price scenarios and the associated IL risk in GammaSwap:
-50% | IL is 5.72%
-25% | IL is 1.03%
-10% | IL is 0.14%
+10% | IL is 0.11%
+50% | IL is 2.02%
+100% | IL is 5.72%
+200% | IL is 13.40%
In GammaSwap, there is the risk that not all of the liquidity a user has is available to be withdrawn immediately from the protocol. This is similar to lending markets like Aave. The amount of liquidity available to withdraw depends on the utilization of the pool. For example, assume a 1M TVL pool with a 80% utilization. This means 800k in liquidity is utilized by perpetual option traders. Therefore, there is only 200k available for LPs to withdraw.
Smart contracts are self-executing contracts with the terms of the agreement directly written into code. While they can automate transactions and enforce agreements without intermediaries, they also carry risks such as software bugs, security vulnerabilities that might be exploited by hackers, and the challenge of adapting to unforeseen circumstances, which can lead to loss of funds or unintended outcomes. Smart contract risk is reduced by having security researchers review the contracts and with Lindy (time). GammaSwap contracts have been and have never been exploited. There is an active on ImmuneFi to reward hackers who find issues with the contracts.