Understanding Impermanent Loss

Why is my CATS token in the CATS-WBCH Liquidity Pool is getting smaller?

Should I remove my LP before I lost all my CATS token there?

The MistSwap DEX in SmartBCH side chain is run by an Automated Market Maker (AMM). That program follows a formula that would maintain the 50/50 value of the two tokens or coins in the LP.

Let us say, you deposited CATS and WRAPPED BCH into an CATS-WBCH liquidity pool and the price of CATS changed a few days later but WBCH's price remained the same, the AMM will then remove some CATS tokens from your LP in order to maintain that 50/50 value of both tokens. The CATS you loss is called an impermanent loss.

SITUATIONS WHERE IMPERMANENT LOSS OCCURS

1) CATS price increases in value while WBCH did not or vice versa.
2) CATS price increases in value and WBCH decreases or vice versa.

IMPERMANENT LOSS WILL NOT HAPPEN IF:

1) CATS and WBCH's prices both increase with the same increase percentage.
2) CATS and WBCH's prices both decrease with the same decrease percentage.
3) CATS and WBCH prices did not change

SHOULD I REMOVE MY LIQUIDITY BECAUSE OF IMPERMANENT LOSS?

There's a reason why it is called an IMPERMANENT loss and it is simply because it is not permanent. The prices of your tokens could go back to its balance price again--- that is the BEST TIME TO WITHDRAW your LP. Yes, you heard it right... your tokens could go back to its original volume or number again.

The AMM (Automated Market Maker) will add the lost tokens once the value of both tokens will go back to your ENTRY price. Your impermanent loss will only become a permanent loss if you will insist in removing your LP even though it is in an impermanent loss status.

So what you should do?
Check the status of your LP before you will remove it. There are impermanent loss calculators online. Make use of them.

The team offers ways to mitigate our impermanent loss problem by rewarding us with a share percentage from the transaction fees in the LP and by letting our LP mint for MIST in the FARM. So do not forget to stake you LP in the FARM when you are done providing liquidity.

The longer your LP stays in the pool and the more people buying and selling those tokens in the LP, the more earnings you will get from the transaction fees and the more MIST reward be minted for you in the farm.

MistSwap is still very fresh and young in the market. Massive project developments are on its way. Those will surely result to mass adoption of our beloved Eagle token and coin MIST and WBCH .

The more people coming in and engaging in buying and selling, the more LP providers would earn.

So HODL strong people! Let your LP work for you.