Impermanent Loss(IL)
The loss in value compared to simply holding assets, caused by providing liquidity to an AMM as prices diverge.
In-Depth Explanation
When you LP in an AMM, the pool rebalances as prices change—selling the appreciating asset and buying the depreciating one. This means LPs always have less of the winner. The loss is 'impermanent' because it reverses if prices return to the original ratio. IL can exceed trading fee earnings in volatile markets.
Related Terms
Automated Market Maker
AMMA smart contract that provides liquidity and enables trading using a mathematical formula instead of an order book.
Liquidity Pool
LPA smart contract holding paired assets that enables trading, lending, or other DeFi activities.
LP Token
A token representing a liquidity provider's share of a liquidity pool, redeemable for underlying assets plus earned fees.
More in Yield
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Capital that moves between protocols purely to chase the highest incentives, with no loyalty or long-term commitment.
Annual Percentage Yield
APYThe annualized return on an investment accounting for compound interest.
Annual Percentage Rate
APRThe annualized return on an investment without accounting for compounding.
Real Yield
Yield derived from actual protocol revenue and economic activity, not token emissions or inflation.