# Impermanent Loss Risk ⎊ Area ⎊ Resource 2

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## What is the Risk of Impermanent Loss Risk?

Impermanent loss risk represents the potential loss incurred by providing liquidity to an automated market maker pool when the price of deposited assets changes relative to each other. This risk arises from the rebalancing mechanism of the pool, where the liquidity provider's share of assets decreases in value compared to simply holding the assets in a wallet. The magnitude of the loss increases with greater price volatility between the paired assets.

## What is the Liquidity of Impermanent Loss Risk?

Liquidity providers face this risk when contributing capital to decentralized exchanges. The loss is considered "impermanent" because it can reverse if the asset prices return to their original ratio. However, for most liquidity providers, the loss becomes permanent upon withdrawal from the pool.

## What is the Hedging of Impermanent Loss Risk?

Quantitative traders and liquidity providers utilize various strategies to mitigate impermanent loss risk. These techniques include providing liquidity to stablecoin pairs, which have minimal price divergence, or employing options and derivatives to hedge against potential price movements. Understanding this risk is fundamental to calculating the true yield of liquidity provision.


---

## [Blockchain Based Marketplaces Growth Trends](https://term.greeks.live/term/blockchain-based-marketplaces-growth-trends/)

## [Option Greeks Calculation Efficiency](https://term.greeks.live/term/option-greeks-calculation-efficiency/)

## [Real-Time Loss Calculation](https://term.greeks.live/term/real-time-loss-calculation/)

## [Capital Efficiency Framework](https://term.greeks.live/term/capital-efficiency-framework/)

---

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**Original URL:** https://term.greeks.live/area/impermanent-loss-risk/resource/2/