The risks of liquidity pools
- If you provide liquidity to an AMM, you’ll need to be aware of a concept called impermanent loss. In short, it’s a loss in dollar value compared to HODLing. If you’re providing liquidity to an AMM, you’re probably exposed to impermanent loss.
- Another thing to keep in mind is smart contract risks. When you deposit funds into a liquidity pool, they are in the pool.
- Be wary of projects where the developers have permission to change the rules governing the pool. Sometimes, developers can have an admin key or some other privileged access within the smart contract code.
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