Impermanent Loss
Also known as: Liquidity Divergence Risk, AMM Loss, DeFi Value Imbalance
A temporary loss in value that occurs when providing liquidity to AMMs due to price divergence between assets.
Impermanent loss occurs when a liquidity provider (LP) deposits two assets into an automated market maker (AMM) pool, and their prices diverge over time. This divergence can result in less value compared to simply holding the assets. The loss is 'impermanent' because it can be reversed if asset prices return to their original ratio. However, if an LP withdraws their funds while the price imbalance persists, the loss becomes permanent. IL is a key risk in DeFi liquidity provision, especially for volatile token pairs. Some protocols offer incentives or dynamic fees to offset this risk.