What is Impermanent Loss?
The temporary loss of value when providing liquidity to an AMM compared to simply holding.
Impermanent Loss Explained
Impermanent loss (IL) occurs when the price ratio of tokens in a liquidity pool changes after you deposit. The greater the price divergence, the larger the loss compared to simply holding the tokens. The loss is "impermanent" because it only becomes permanent if you withdraw while prices are divergent. If prices return to their original ratio, the loss disappears.
Key Characteristics
- Only affects liquidity providers
- Increases with price divergence
- Can be offset by trading fees earned
- Becomes permanent upon withdrawal
Real-World Example
If you provide SOL/FLPS liquidity and FLPS price doubles while SOL stays flat, withdrawing would yield fewer FLPS and more SOL than you deposited, potentially resulting in less total value.
Related Terms
Frequently Asked Questions
What does Impermanent Loss mean?
The temporary loss of value when providing liquidity to an AMM compared to simply holding.
How does Impermanent Loss work in DeFi?
Impermanent loss (IL) occurs when the price ratio of tokens in a liquidity pool changes after you deposit. The greater the price divergence, the larger the loss compared to simply holding the tokens. The loss is "impermanent" because it only becomes permanent if you withdraw while prices are divergent. If prices return to their original ratio, the loss disappears.
Can you give an example of Impermanent Loss?
If you provide SOL/FLPS liquidity and FLPS price doubles while SOL stays flat, withdrawing would yield fewer FLPS and more SOL than you deposited, potentially resulting in less total value.
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