Impermanent Loss is a concept that is commonly associated with liquidity provision in Decentralized Exchanges (DEXs) and Automated Market Maker (AMM) protocols. It refers to a potential risk or loss that liquidity providers may experience due to the volatility of the assets they provide liquidity for.
The term “Impermanent” Loss is used because the loss is not permanent if the asset prices return to their original relative values. If the prices revert to their initial ratio, the liquidity provider can recover their initial value.
Impermanent Loss occurs when the total worth of all cryptocurrency holdings deposited by a liquidity provider into a pool starts to differ from the total worth when first deposited.
It’s important to note that Impermanent Loss affects liquidity providers and not traders. Traders can take advantage of the liquidity provided by others, but the providers may suffer losses if there are significant price movements.
Source: Impermanent Loss Explained | Binance Academy
Credits:
Sundaram Shanmugam
SMSF Team
