Impermanent Loss is a temporary unrealized loss of funds experienced by a liquidity provider due to price changes of their deposited assets in an automated market maker (AMM) pool. This loss occurs when the price ratio of tokens in the pool diverges from their initial deposit ratio. It becomes “permanent” only if the liquidity provider withdraws their assets at a lower value than if they had simply held them outside the pool. This risk is inherent to providing liquidity in volatile decentralized exchanges.
Context
Impermanent Loss remains a significant consideration for participants in decentralized finance liquidity provision. Discussions focus on strategies to mitigate this risk, such as providing liquidity to stablecoin pairs or using concentrated liquidity protocols. A critical future development involves advanced AMM designs that reduce or compensate for impermanent loss. Observing new research and protocol innovations offers insight into risk management for liquidity providers.
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