Impermanent Loss (IL) Definition - Glossary

Impermanent Loss is when liquidity providers face potential loss due to price changes compared to holding assets.

Impermanent Loss is a temporary reduction in value experienced by liquidity providers in automated market makers. It occurs when the price ratio of the deposited tokens changes after they are deposited in the pool. This change can lead to less value when withdrawn compared to simply holding the tokens. The loss is "impermanent" because it may be offset if the price ratio returns to its original state. However, it becomes permanent if the provider withdraws their funds while the price discrepancy persists. Strategies like choosing stablecoin pairs or waiting for fees to offset the loss can mitigate its impact.