Does Impermanent Loss Become Permanent upon Withdrawal from the Liquidity Pool?
Yes, the "impermanent" nature of the loss refers to the theoretical possibility of the token prices returning to their initial ratio before the liquidity provider withdraws. However, the loss is realized and becomes permanent the moment the liquidity provider removes their assets from the pool.
At withdrawal, the LP receives the current composition of the pool, which reflects the price divergence and thus the loss relative to simply holding the original assets. The term "impermanent" is only relevant while the assets are still staked.
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.
Perpetual Swaps
Definition ⎊ Perpetual swaps are a type of derivative contract, highly popular in cryptocurrency markets, that allows traders to speculate on the future price of an asset without an expiration date.
Initial Ratio
Foundation ⎊ Initial Ratio, within cryptocurrency derivatives, fundamentally represents the proportional relationship established at contract inception between the underlying asset’s price and the derivative’s price, serving as a critical benchmark for subsequent valuation and risk assessment.
Opportunity Cost
Sacrifice ⎊ The concept of opportunity cost within cryptocurrency, options, and derivatives fundamentally represents the forgone benefit from selecting one strategy over another.
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.
Liquidity Pool
Pool ⎊ A liquidity pool, within the context of cryptocurrency derivatives and options trading, represents a centralized reserve of tokens locked in a smart contract, facilitating decentralized trading and price discovery.