What Is the Relationship between Impermanent Loss and High Volatility?
Impermanent loss is directly proportional to the magnitude of the price divergence between the two tokens in the pool. High volatility increases the probability and magnitude of this price divergence, thereby increasing the risk and potential size of impermanent loss.
Pools with highly correlated assets (like stablecoins) have lower IL risk, while pools with volatile, uncorrelated assets have higher IL risk.
Glossar
Price Divergence
Discrepancy ⎊ Price Divergence occurs when the quoted price of an asset or derivative across two different venues or instruments deviates significantly from their theoretical parity relationship, creating an arbitrage opportunity.
High Volatility
Instability ⎊ High volatility in cryptocurrency, options, and derivatives signifies amplified and accelerated price movements, exceeding historical norms and creating substantial risk exposures for market participants.
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.
Uncorrelated Assets
Diversification ⎊ Uncorrelated assets, within cryptocurrency, options, and derivatives, represent instruments exhibiting low or negative statistical correlation to prevailing market factors, offering portfolio resilience.