AMM Impermanent Loss
Impermanent loss occurs in automated market makers when the price of a deposited asset changes compared to when it was deposited, resulting in a lower value than if the assets had simply been held in a wallet. This is a significant risk for liquidity providers in decentralized finance, especially in volatile derivatives markets.
The loss is termed impermanent because it can be reversed if the price returns to the original entry point, but it becomes realized if the provider withdraws their liquidity during a price deviation. For those providing liquidity to trading pairs involving volatile tokens, managing impermanent loss is a core component of risk management.
It effectively acts as a tax on liquidity provision and is a key factor in the sustainability of yield-bearing protocols.