Impermanent Loss Risks

Impermanent loss is a risk faced by liquidity providers in automated market makers when the price of deposited assets changes compared to when they were deposited. Because liquidity providers must maintain a specific ratio of assets, a price divergence causes the protocol to sell the performing asset and buy the underperforming one.

This results in a portfolio value that is lower than if the assets had simply been held in a wallet. It is a fundamental risk in DeFi that directly impacts the attractiveness of liquidity pools.

If the impermanent loss exceeds the fees earned from trading, the provider incurs a net loss. Understanding this risk is crucial for managing portfolios and predicting capital rotation, as providers will exit pools when the risk of loss outweighs the potential yield.