Impermanent Loss (IL)

From CryptoWiki


"Simply put, impermanent loss is the difference between holding tokens in an AMM and holding them in your wallet. It occurs when the price of tokens inside an AMM diverge in any direction. The more divergence, the greater the impermanent loss."

  • From this blog (14-2-2019):

"Update 30 August 2020: this article originally used the term “impermanent loss” to describe the losses liquidity providers experience due to price divergence. The word “impermanent” was chosen because the loss due to price divergence may be reversed if the price divergence is also reversed. However, the use of this term could create the expectation that losses are guaranteed to be reversed, which is not the case. To better reflect this, the article has now been updated to use the term “divergence loss” instead."

"Impermanent loss" (IL) refers to the fact that if you sell a token before it rises in value it would have been better to hold it and sell more at the higher price Similarly, if you buy a token and it drops in value it would also have been better to hold. The "impermanent" part refers to the fact that if you sell a token and it rises in value you, but buy it back as it falls in value you are back to where you started. IL is only "impermanent" if prices eventually revert to where they started. Then all fees are pure profit."

  • Swissborg has a blog which also goes a bit deeper into the phenomena (22-9-2021).