What Is Impermanent Loss and How Does It Affect Liquidity Providers for Derivative Pools?

Impermanent loss is the difference in value between holding assets in a liquidity pool and simply holding them in a wallet. It occurs when the price of the assets in the pool changes.

If the price of one asset in the pool diverges significantly from the other, the value of the liquidity provider's stake in the pool can be less than if they had just held the assets separately. For derivative pools, this risk can be amplified by the inherent volatility of the derivatives.

Liquidity providers are compensated for this risk through trading fees.