Impermanent loss is the loss liquidity providers suffer when the price ratio of paired assets diverges from when they provided liquidity. Deposit 1 ETH and 1000 USDC at a $1000 ETH price. If ETH rises to $2000, the constant product formula forces the pool to maintain x * y = k. As prices diverge, you end up with more of the cheaper asset and less of the expensive asset. You might have 0.7 ETH and 1400 USDC. If you'd just held your original tokens, you'd have 1 ETH worth $2000 plus $1000 USDC, total $3000. Instead, you have about $2800. The difference is impermanent loss. It's called impermanent because if prices return to the original ratio, the loss disappears. For traders betting on future price convergence, this is acceptable. For long-term holders, impermanent loss is a real drag. More volatile assets have greater impermanent loss. Stablecoin pairs have almost no impermanent loss. Concentrated liquidity strategies reduce impermanent loss by concentrating capital in the expected price range.
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