Impermanent loss
defi · markets
The underperformance an AMM liquidity provider can face versus simply holding the deposited assets when prices diverge.
- Also known as
- IL, divergence loss
Impermanent loss compares the value of a liquidity provider's pool position to the value of simply holding the original assets. In constant-product AMMs, arbitrage rebalances the pool as prices move, changing the LP's asset mix.
Trading fees can offset impermanent loss, but returns depend on volume, volatility, fee tier, incentives, and smart contract risk. Concentrated liquidity can increase fee income while also increasing exposure to price range management.
Related terms
Decentralized Exchange
→A decentralized exchange (DEX) lets users trade digital assets from their wallets through smart contracts or peer-to-peer settlement.
trading · exchange · blockchain
Fungible Token
→A fungible token has interchangeable units, so each unit of the same token is equivalent for payment, accounting, or trading.
token · standard
Front-Running
→Front-running means acting on knowledge of a pending trade or transaction to execute first and capture an advantage.
trading · attack
Flash Loan
→A flash loan is an uncollateralized DeFi loan that must be borrowed and repaid within the same transaction.
defi · lending