Impermanent Loss In DeFi — The Risks Involved In Providing Liquidity

4 min read

The impermanent loss also called divergent loss, is the difference between when you are holding tokens in an AMM (Automated Market Maker) Liquidity Pool and just simply holding them (i.e. HODLing) on the blockchain. When tokens are provided for liquidity in the market, they are funded to other users from a Liquidity Pool. When HODLing, the tokens are simply being held at market value. In providing liquidity, the price ofthe tokens in a Liquidity Pool can diverge in any direction. The more divergence there is, the more impermanent loss a user (i.e. Liquidity Provider) suffers. This is called impermanent because it can only be temporary. When…...

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vincenttabora I am a network engineer and technology writer, with a deep focus in blockchain and machine learning technology. I have extensive experience in the IT industry developing and implementing solutions in various industries. I eventually became more interested in blockchain due to the rise in cryptocurrency like Bitcoin. I realized that it was not about speculating on price value, it is a disruption in the finance industry. At the moment I like to educate about the significance of cryptocurrency, which I feel has great potential to drive innovation not just in financial systems, but even in settlements and trust.