Impermanent loss
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."
Related Terms
Decentralized Exchange
→A decentralized exchange (DEX) is a platform that allows users to trade digital assets directly with each other, without the need for an intermediary, such as a brokerage or bank.
Fungible Token
→A token where each unit is interchangeable with any other unit of the same type, like currency.
Front-Running
→Executing a trade or transaction in anticipation of a known pending order to gain advantage; in crypto, often via observing the public mempool.
Flash Loan
→An uncollateralized on-chain loan that must be borrowed and repaid within a single transaction, enabled by composable DeFi.
All terms and definitions may update as the Cryptionary improves.
