Impermanent Loss

Impermanent loss occurs when a liquidity provider deposits assets in a liquidity pool, and the asset prices change significantly from the initial deposit value. This loss is “impermanent” because if asset prices return to their original levels, the provider’s losses may be offset. In crypto market making, impermanent loss is a common risk for liquidity providers, especially in volatile markets. Many decentralized exchanges (DEXs) offer incentives to offset this risk, such as fee-sharing models.