@velours

Impermanent loss occurs when the value of assets in a liquidity pool changes relative to each other after they are added to the pool. This happens because decentralized exchanges (DEXs) typically use an automated market maker (AMM) model, where the ratio of assets in the pool must remain constant. If one asset appreciates significantly while the other depreciates, liquidity providers (LPs) may end up with a smaller value of the more profitable asset compared to simply holding it outside the pool. The loss is “impermanent” because if the asset prices return to their original ratio, the loss can be recovered. However, if the price disparity persists, LPs could face long-term losses, making it crucial to carefully assess the risks when providing liquidity.

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