✅ Understand Impermanent Loss
Master IL calculations, risk assessment, and mitigation strategies
Your Progress
0 / 5 completed🎓 Key Takeaways
Let's review the essential concepts about impermanent loss and how to manage it effectively.
Mathematical Reality
IL is a mathematical consequence of constant product (x×y=k) pools, not a bug. Any price divergence causes automatic rebalancing, resulting in less of the appreciating asset and more of the depreciating one.
Bidirectional Risk
IL occurs with ANY price change, whether up or down. A 2x increase causes ~5.7% IL, same as a 0.5x decrease. The direction doesn't matter—only the magnitude of divergence.
Fees Can Offset
Trading fees accumulate continuously and can exceed IL over time. High-volume pools with moderate volatility often produce net profits for LPs despite IL. Time and volume are your allies.
Smart Selection
Minimize IL by choosing stablecoin pairs or correlated assets (ETH/stETH). Understand your risk tolerance and calculate whether expected fees justify the IL exposure for each pool.
Before Providing Liquidity, Consider:
- •Price Volatility: Higher volatility = more IL risk
- •Fee APR: Must be sufficient to offset expected IL
- •Time Horizon: Longer periods allow more fee accumulation
- •Asset Correlation: Correlated assets reduce IL risk dramatically
📝 Knowledge Check Quiz
Test your understanding of impermanent loss concepts:
What is impermanent loss?