How Does the Concept of “Yield Farming” Often Mask the True Impact of Impermanent Loss?

Yield farming often involves LPs receiving additional incentive tokens on top of their standard trading fees. These extra rewards, which can be substantial, are often presented as a high Annual Percentage Yield (APY).

This high APY from incentive tokens can temporarily overshadow or completely hide the realized impermanent loss. LPs may see a positive overall return due to the value of the reward tokens, but their underlying LP position is still experiencing a loss relative to simply holding the assets.

This masks the true cost of the impermanent loss risk.