What Is Impermanent Loss and How Does It Relate to Providing Liquidity?
Impermanent loss is a potential risk for liquidity providers (LPs) in AMMs. It is the difference in value between holding two tokens in a liquidity pool versus simply holding them in a wallet.
If the price of one token changes significantly relative to the other, the value of the LP's stake in the pool can be less than if they had just held the assets. The "loss" is unrealized until the LP withdraws their liquidity from the pool.
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.
Liquidity Pool
Pool ⎊ A liquidity pool, within the context of cryptocurrency derivatives and options trading, represents a centralized reserve of tokens locked in a smart contract, facilitating decentralized trading and price discovery.
Concentrated Liquidity
Allocation ⎊ ⎊ Concentrated liquidity represents a departure from traditional automated market maker models by enabling liquidity providers to specify precise price ranges where their capital will be deployed, fundamentally altering capital efficiency.