Define ‘Impermanent Loss’ in the Context of DAO Treasury Management.
Impermanent loss (IL) is the temporary loss of funds a liquidity provider (LP) experiences when the price of their deposited assets changes compared to simply holding them in a wallet. It occurs because the automated market maker (AMM) formula forces the LP to sell the asset that goes up and buy the asset that goes down.
For a DAO treasury providing liquidity, this loss can become permanent if not offset by trading fees.
Glossar
Impermanent Loss
LiquidityRisk ⎊ Impermanent Loss quantifies the temporary divergence in value between holding assets in a decentralized liquidity pool versus simply holding those same assets in a non-interest-bearing wallet, resulting from price movements between the deposited pair.
Trading Fees Offset
Compensation ⎊ The concept of Trading Fees Offset, within cryptocurrency derivatives, options, and broader financial derivatives markets, fundamentally addresses the mitigation of costs associated with trading activity.
Automated Market Maker
Architecture ⎊ Automated Market Makers (AMMs) represent a paradigm shift in decentralized exchange (DEX) design, moving away from traditional order book models to a constant function market mechanism.
Dao Treasury
Control ⎊ Dao Treasury refers to the pool of assets, often composed of protocol fees, native tokens, or various cryptocurrencies, managed collectively by the decentralized autonomous organization through on-chain voting.
Liquidity Provider
Provision ⎊ A liquidity provider in cryptocurrency derivatives contexts furnishes capital to decentralized exchanges (DEXs) or automated market makers (AMMs), enabling trading by establishing bid-ask spreads; this process fundamentally addresses the inherent challenges of order book depth in nascent markets, and is critical for efficient price discovery.