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Impermanent Loss 101
Overview
Impermanent loss (or divergence loss) is a risk faced by users who deposit their tokens in AMM liquidity pools. It is the difference in value between holding tokens in an AMM liquidity pool and holding them in your wallet.
Liquidity pools consist of multiple tokens (usually two) paired together in a pool. IL occurs when the tokens inside the pool diverge in price. The greater the divergence, the greater the risk of negative returns for the pool's LPs.
The risk is referred to as "impermanent" because the loss is only realized when you withdraw your tokens from the pool. If the relative prices of tokens in the pool return to their original state when you deposited tokens, the loss is minimized or eliminated.
However, this is rarely the case. Often, the losses become permanent the moment you withdraw your tokens, reducing your earnings and sometimes wiping out your entire share of profits. Even when accounting for fees and rewards, you suffer negative returns versus simply holding your tokens in your wallet.
How IL works
When tokens paired together in a pool change in price relative to one another, an arbitrage opportunity emerges, incentivizing re-balancing of the pool by third-party trading bots known as arbitrageurs.
Re-balancing causes the liquidity pool to automatically liquidate the rising token at a discount and purchase the token whose price is falling at a premium. As a depositor, you're left holding less of the token that increased in price, and more of the token that decreased in price. Over time, this causes the cumulative value of your pooled tokens to be worth less than if you simply held the two assets in your wallet.
Technical IL explainer can be found in the section: "Impermanent Loss in a Traditional AMM" in this paper.
The Risk
​On-chain data analyzing over $100b+ in trading volume and 20,000 liquidity provider wallets shows that users providing liquidity to unprotected AMM pools suffered negative returns roughly 50% of the time.
We consider this risk to be intolerable for many users — which is why we designed a safer and simpler way to earn on your favorite tokens with zero IL risk.
Last modified 1mo ago
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