What is Impermanent Loss?
- Impermanent loss occurs when the price of assets in a pool changes. Users risk increased volumes of impermanent loss when the difference between the pool price and market price of a token increases.
- Price change that leads to impermanent loss occurs due to the price determination formula, AMM (Automated Market Maker). Due to the nature of AMM, the transaction rate of tokens cannot be automatically adjusted. Therefore, a user must purchase undervalued assets or sell overvalued assets until the price formed in the AMM equals the price of the market.
- Losses can sometimes be larger than the sum of the rewards gained from the pool. When the price of the token in the AMM converges with the market value, the loss disappears, hence the name.