Liquidity Providing Profitability

Hello! I am very new to DeFi and I would like to engage in liquidity providing, but I fear impermanent loss. I know that liquidity providing can be profitable (otherwise no one would do it), but I don’t know how. This being said, could you please explain to me how you offset impermanent loss and make the additional gains of liquidity providing large enough to be worth the risk of doing so? Thank you!

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  1. How to avoid impermanent loss is covered at 9 minutes, but watch the whole vid. This is the vid that got me on a seemingly decent LP position. Additionally you should know they did a study and 80% of liquidity providing people in the study lost out to impermanent loss (divergence loss). Though they still made fees, so that somewhat offsets it generally (you get some fees but your net assets are worth less than they would have been just hodling). The reason, in my mind, is easy, most assets are not correlated in price, thus if you provide liquidity then you’ll inevitably have divergence/impermanent loss for those not very well correlated assets. Just do not provide liquidity for non-correlated assets.

    See the webpage he uses to tell which coins are correlated with other coins and which aren’t. A score of 1 would be perfect correlation, .9 is still great correlation, .8 is getting uncorrelated, .7 and below are starting to get very uncorrelated.

    https://www.youtube.com/watch?v=POE2_xngF3w&ab_channel=JustinBram

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