Impermanent Loss

Impermanent Loss refers to the temporary loss of value experienced by liquidity providers in automated market makers (AMMs) when the price of their deposited assets fluctuates compared to when they initially deposited them. This occurs because AMMs, such as Uniswap, require liquidity providers to deposit an equal value of two assets into a liquidity pool. When the price of one of the assets changes relative to the other, the AMM automatically adjusts the pool's asset ratios to maintain balance. If the liquidity provider withdraws their assets during this fluctuation, they may receive a lower value compared to holding the assets outside the pool. However, the loss is "impermanent" because the value can recover if the asset prices return to their original ratio.