Impermanent loss is the loss LPs experience when providing liquidity to AMMs compared to holding assets, due to price divergence from the deposit ratio.
In constant product AMMs (x*y=k), prices adjust with trades. When one asset's price moves relative to the other, the pool rebalances, leaving LPs with a different mix that can be worth less than simply holding.
"If token A doubles while token B stays flat, the pool sells A into B along the curve, reducing exposure to A's upside."
"Fees can offset impermanent loss; high-volume pools may still be profitable for LPs."
Risks include price volatility, oracle/market manipulation, and MEV. Advanced strategies use concentrated liquidity, hedging, or dynamic fees to mitigate losses.
"Front-running and sandwich attacks worsen LP outcomes by extracting value around trades."
"Flash loans can amplify price swings momentarily, impacting pools that rely on on-chain prices."
All terms and definitions may update as the Cryptionary improves.