Impermanent Loss
Temporary loss due to price variations in a liquidity pool.
Beginner-friendly explanation
Impermanent loss happens when you deposit two cryptos in a pool and their prices change a lot in the meantime. It’s not a real loss unless you withdraw your funds.
Example: You deposit Bitcoin and Ethereum in a pool. If Bitcoin rises sharply, you lose a bit compared to just holding Bitcoin.
Intermediate-level insight
Impermanent loss stems from automatic pool rebalancing: when relative prices change, your effective exposure becomes unbalanced. Greater volatility between assets leads to greater impermanent loss.
Example: In an ETH/USDC pool, if ETH doubles and you withdraw, you’ll have less ETH than expected.
Advanced perspective
Impermanent loss is a critical component of the AMM (Automated Market Maker) model. Mitigation strategies include providing correlated pairs, using innovative AMMs (e.g., Curve), or offsetting with high farming yields.
Example: A provider chooses Curve to deposit correlated stablecoins and minimize impermanent loss.
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impermanent loss, temporary loss, liquidity pool, AMM, arbitrage, volatility, Curve, farming