Understand the risk
Providing liquidity can be a great way to earn yield, but it's important to know the risks. Here’s what you should keep in mind:
1. Impermanent Loss – The Biggest Risk
Happens when the price of one token in your LP pair changes a lot compared to the other.
The more volatile the tokens, the higher the risk.
Concentrated positions can make this effect stronger.
Example:
You provide SOL-USDC liquidity when SOL is $300.
If SOL’s price jumps to $600, your LP position adjusts.
Instead of holding the same amount of SOL and USDC, you now have only USDC.
If you had just held SOL, your value would have doubled. But as an LP, you miss some of the upside—this is impermanent loss.
2. Market Risk
If SOL drops from $300 to $150, your entire LP position also drops in value.
In extreme cases, your liquidity may go out of range, meaning you stop earning fees.
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