Impermanent Loss
Revision as of 13:40, 25 April 2022 by Sov (talk | contribs) (Created page with "When tokens paired together in a pool change in price relative to one another, an arbitrage opportunity emerges, incentivizing re-balancing of the pool by third-party trading bots known as arbitrageurs. Re-balancing causes the liquidity pool to automatically liquidate the rising token at a discount and purchase the token whose price is falling at a premium. As a depositor, you're left holding less of the token that increased in price, and more of the token that decreas...")
When tokens paired together in a pool change in price relative to one another, an arbitrage opportunity emerges, incentivizing re-balancing of the pool by third-party trading bots known as arbitrageurs.
Re-balancing causes the liquidity pool to automatically liquidate the rising token at a discount and purchase the token whose price is falling at a premium. As a depositor, you're left holding less of the token that increased in price, and more of the token that decreased in price. Over time, this causes the cumulative value of your pooled tokens to be worth less than if you simply held the two assets in your wallet.[1]