Impermanent Loss
Also known as divergence loss
Impermanent loss is the shortfall a liquidity provider can experience compared with simply holding the same tokens, caused by the prices of the pooled tokens moving apart. As traders rebalance the pool, providers end up holding more of the token that fell in value. The loss is called impermanent because it shrinks if prices return to their original ratio, but it becomes real when funds are withdrawn at a different ratio.
Related terms
- Liquidity Pool Tokens pooled in a contract to enable trading or lending. DeFi
- Automated Market Maker A DEX design that prices trades with a formula and token pools. DeFi
- Maximal Extractable Value Profit captured by reordering or inserting pending transactions. DeFi
- Liquid Staking Staking while receiving a tradable token for the staked deposit. DeFi