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.
Glossar
Liquidity Providers
Capital ⎊ These entities supply the necessary assets to decentralized exchanges or automated market makers to facilitate continuous trading in crypto derivatives and options.
Impermanent Loss
Exposure ⎊ Impermanent loss, a risk inherent in automated market maker (AMM) protocols and liquidity provision, arises from price divergence between assets deposited and their subsequent value upon withdrawal.
Trading Fees
Cost ⎊ Trading fees represent a quantifiable deduction from capital employed in executing strategies across cryptocurrency, options, and derivative markets, directly impacting net profitability and risk-adjusted returns.