Divergence Risk

Divergence risk, often associated with impermanent loss, is the financial risk that the value of assets held in a liquidity pool will deviate significantly from the value of holding those assets outside the pool. This risk arises because the automated market maker forces the liquidity provider to sell the appreciating asset and buy the depreciating one to maintain the pool's balance.

If the price divergence is substantial, the total value of the liquidity position may decrease compared to a simple holding strategy. Investors manage this risk by analyzing historical price correlation between paired assets and selecting pools with lower expected volatility or by using hedging instruments like options to offset potential losses.