Understanding Impermanent Loss
Impermanent Loss (IL) is a situation that occurs when providing LPs, where the price of the tokens fluctuate and losses are incurred temporarily as a result.
It is necessary to understand IL before providing liquidity, it's a major factor in deciding when to enter/leave an LP position. ☝🐱
When participating in AMMs, you will always incur some impermanent loss. This occurs not only when prices go down, but also up: the variation of price between the two paired tokens causes IL. It is called impermanent, because it's a temporary state which may improve (or worsen) over time. The loss is not permanent until crystallized by exiting the pool.
Trading fees and yield farming can help to negate IL. Over time, as fees and rewards accrue, your position can become significantly more profitable than simply holding the two tokens, unpaired.
Always DYOR: 🔍😼
- Research and understand impermanent loss.
- Use freely available tools such as IL calculators to understand the impact of price movements.