Providing Liquidity to a Pool, does come with the risk of Impermanent Loss

Impermanent Loss is a temporary loss of funds occurring when providing liquidity. It is essentially the difference between holding assets in your Wallet versus providing Liquidity.

IL occurs when the price ratio of the supplied token pair changes. As a simple rule, the more volatile the assets are in the pool, the more likely it is that you can be exposed to impermanent loss. As the AMM dictates that the total liquidity must remain the same, the ratio is readjusted in order to establish an equilibrium.

The ‘impermanent’ part of IL is an apt description, as the value of the token may yet return to its initial price if it is left in the pool. If the price realigns, then the IL no longer exists, however, if the investor withdraws their funds from the liquidity pool, then the loss is realized fully.

• Impermanent loss is caused by a bidirectional change in value of either one or both tokens within a pair.
• The more volatile the underlying tokens are in the pool, the more likely you are to experience Impermanent Loss
• Impermanent Loss is not permanent and is only realized when you withdraw from a Liquidity Pool.

For more information on Impermanence Loss please refer to our medium article “Impermanent Loss Explained”.

How to Avoid Impermanent Loss