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What Is Impermanent Loss and How Does It Affect Liquidity Providers in Decentralized Finance (DeFi)?

Impermanent loss is the risk of your deposited assets losing value in a liquidity pool due to price changes.
Greeks.Live03.11.25

What Is Impermanent Loss and How Does It Affect Liquidity Providers in Decentralized Finance (DeFi)?

Impermanent loss is a potential risk for liquidity providers in decentralized finance (DeFi) when they provide assets to a liquidity pool. It occurs when the price of the tokens in the pool changes compared to when they were deposited.

The larger the price change, the greater the impermanent loss. This loss is "impermanent" because it is only realized if the liquidity provider withdraws their assets from the pool.

If the prices of the tokens return to their original ratio, the loss is erased. However, if the prices diverge significantly, the liquidity provider can suffer a substantial loss compared to simply holding the tokens in their wallet.

Beyond Trading Fees, What Other Incentives Might a DeFi Protocol Offer to Mitigate Impermanent Loss?
How Does Competition among Liquidity Providers Benefit the Trader Requesting a Quote?
What Is the Risk of ‘Impermanent Loss’ in DeFi?
What Role Do Arbitrageurs Play in the Realization of Impermanent Loss in a DeFi Pool?

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