How does impermanent loss work with a stablecoin?

Asked 2 years ago

I have been a liquidity provider on a DeFi lending platform for the past month, and this is the first time I have a stablecoin within my trading pair. Would this increase my risk of impermanent loss, or will my stablecoin balance out the volatile crypto coin (Eth)?

Lyric Carson

Tuesday, August 16, 2022

If the stablecoin is truly stable, then you'll have minimal impermanent loss, or none at all. However, if the stablecoin isn't backed by real cash, you might suffer from some impermanent loss. Some examples of fiat-backed stablecoins are USDT and USDC. They are quite stable and almost never fluctuate more than 2% in price. On the other hand, crypto-backed stablecoins like DAI (ETH-backed) or algorithmic ones like USDN are more volatile, so you can expect some impermanent loss from them.

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