How 4RX protects Investors from Impermanent Loss
One of the most common ways to earn passive income on cryptocurrency investments is by providing liquidity to a pool or Automated Market Maker (AMM) where the pool pays out accumulated revenue in a platform’s governance token as a reward to investors. While some platforms such as Sushiswap or Balancer offer some returns of 10% APR or higher, there is a downside called impermanent loss.
Impermanent loss occurs when the price of an asset differs from the deposited price. How pools and AMMs work is that each pool has a ratio of how coins are broken up in that respective pool. For example, Balancer offers a 50/50 pool ratio split between Compound token (COMP) wrapped Ethereum (wETH). For simplicity, we will use estimated market prices of $400 for COMP and $2000 for wETH in the example below:
The ratio of COMP to wETH is calculated by dividing $2000 by $400 to get a token ratio of 5 COMP to 1 wETH in this specific pool.
This token ratio does not stay the same as the price of tokens fluctuate. Let’s say COMP token increases to $1000 per token and wETH increases to $4000. The ratio is calculated by dividing $4000 by $1000 to get a new token ratio of 4 COMP to 1 wETH.
An investor currently has an impermanent loss of 1 COMP. The loss is termed “impermanent” unless the investor decides to pull liquidity which would now mean it is a permanent loss.
The 4RX token protects investors from impermanent losses through its proprietary staking and farming mechanism. In 4RX staking, an investor is providing liquidity to a pool with a near constant ratio so the risk of impermanent loss is extremely low.
