How Does Impermanent Loss Relate to Providing Liquidity for Derivative Trading on an AMM?
Impermanent loss occurs when the price of the deposited assets changes compared to when they were deposited. In a standard spot AMM, this is due to arbitrage.
In a derivative AMM, the pool assets might be exposed to the risk of the underlying contract's movement. For example, if a futures pool becomes imbalanced due to many long positions, the liquidity providers face a loss relative to simply holding the underlying assets.
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.
Derivative Trading
Activity ⎊ Derivative trading involves entering into contracts whose value is contingent upon the future price movements of an underlying asset, providing tools for speculation, hedging, and synthetic exposure.
Futures Amm
Architecture ⎊ Futures AMMs, within the context of cryptocurrency derivatives, represent a novel approach to decentralized exchange functionality, specifically designed to facilitate perpetual futures contracts and options trading.
Providing Liquidity
Action ⎊ Providing Liquidity is the act of depositing capital into a decentralized exchange pool or lending market to facilitate trading and earn associated fees or rewards.