Investing with DeFi always comes with risks - DYOR before investing.
Devil Finance has been built with safety and security in mind. However, there are inherent risks when interacting with any decentralized-finance smart contracts. Our team has vigorously reviewed it's smart contracts, and also pursued external auditors to identify potential vulnerabilities in the platform prior to launch. Even so, the possibility of losing some or all of your funds is non-zero. Please exercise caution and work within your own risk framework when it comes to interacting with the platform.
Systematic Risk: Systematic risk would be the decrease of monetary value of assets deposited, be it DEVIL, FTM, BTC, etc. For example FTM could be $3 when you deposit and $2.5 when you withdraw.
Idiosyncratic Risk: Idiosyncratic risk constitutes of risks associated with our actual project. Although our code has been audited by XXX, there are always risks that projects will fall victim to malicious hackers. That being said, our DEVIL developers account for the security risks of smart contracts and will only interact with contracts that meet the security threshold!
Risk of impermanent loss: When a farmer provides liquidity on an AMM, the two assets are deposited at a 50:50 ratio of their value to each other (at the time of depositing). The AMM protocols are controlled by complex mathematical formulas that adjusts the ratios of the underlying assets in the pool whilst also determining their prices. As the value of DEVIL and BOO fluctuates the AMM will adjust the LP farmers ratio to ensure they remain at a 50:50 value. This means that a farmer can lose out on gains from a deposited asset that outperforms.
So, for the purposes of this example let’s assume 1 BOO = 100 DEVIL & 100 DEVIL = 1 BOO. The farmer provides liquidity on an AMM and deposits 100 DEVIL and 1 BOO and receives the ‘receipt’ (LP) token which can then be deposited on Devil Finance to auto-compound. In the event that the price of DEVIL starts to increase as more and more people are purchasing DEVIL, the pool adjusts the ratio to ensure the value remains split 50:50 across DEVIL and BOO.
Now 1 BOO is suddenly only worth 50 DEVIL because of the price jump in DEVIL. But because the protocol automatically adjusted the amount of tokens in the pool, the farmer lost out on the DEVIL rally.
This is impermanent loss. If the price of BOO and DEVIL fluctuate in line with each other then no IL is realized. But if one of the two assets price increases substantially then the farmer loses out.
In the example above the farmer would have been better off simply holding their DEVIL/BOO if they removed their liquidity from the AMM pool.
However, if the farmer stays in the pool and the value of DEVIL goes back down to its original value then the value of the farmer's overall holdings will go back to the original value also and they would have 100 DEVIL & 1 BOO (or even more if they deposited their LP tokens on Devil Finance!).
Remember, Impermanent Losses only become permanent once you remove your liquidity.
One way in which you can reduce your exposure to IL is to provide liquidity for pairs where the relative price of each asset remains fairly constant. For example, a stable coin pair like DAI-USDT would give you very little exposure to IL.
The downside of these pools however, is, you gain no benefit from price increase, the number of these pools are fewer and the returns may not be as attractive as other pools.