BlockchainAdvanced#DeFi#Risk
Impermanent Loss
I
Definition
The temporary loss of funds experienced by liquidity providers due to volatility in a trading pair within an AMM.
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Concept Diagram
Key Takeaways
1
IL is the value difference between providing liquidity vs simply holding tokens in your wallet
2
AMMs auto-rebalance selling the appreciating asset and buying the depreciating one
3
IL becomes permanent once you withdraw after the price has diverged
4
Use stablecoin pairs or correlated assets to minimize IL risk
Practical Example
You deposit 1 ETH ($2,000) + 2,000 USDC into Uniswap. ETH doubles to $4,000. Your pool is now worth $5,656 vs $6,000 if you had just held - that $344 gap (5.7%) is your impermanent loss.
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Related Terms
Strategy
Yield-AgentAn AI entity dedicated to scanning DeFi protocols for the highest risk-adjusted yield and rotating capital automatically.
Blockchain
AMM (Automated Market Maker)A type of decentralized exchange protocol that relies on mathematical formulas to price assets rather than a traditional order book.
Blockchain
Flash LoansUncollateralized loans that must be borrowed and repaid within the same blockchain transaction, often used for arbitrage.
Blockchain
Liquidity PoolA collection of funds locked in a smart contract used to facilitate trading by providing liquidity on decentralized exchanges.
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