What is Impermanent Loss?
Impermanent loss (IL) occurs when you provide liquidity to an AMM and the price ratio of your deposited tokens changes. The loss is "impermanent" because it can reverse if prices return to the original ratio.
How It Happens
When you deposit equal values of two tokens, arbitrageurs rebalance the pool as prices change, leaving you with more of the declining asset.
Minimizing IL
- Use stablecoin pairs (USDC/USDT)
- Choose correlated pairs (stETH/ETH)
- Consider concentrated liquidity positions