Glossary · DeFi
Impermanent loss
Also: divergence loss, IL
Impermanent loss is the shortfall a liquidity provider incurs relative to simply holding the two tokens, caused by the pool rebalancing toward the falling asset as relative prices move apart.
Related terms
- Liquidity pool
- A liquidity pool is a smart contract holding reserves of two or more tokens that traders swap against at a price set by a formula, with the depositors earning a share of trading fees.
- Automated market maker
- An automated market maker is a decentralized exchange design that prices trades from a formula applied to pooled reserves rather than from an order book, so a trade can always execute against the pool at some price.
- Yield farming
- Yield farming is the practice of moving capital between protocols to capture the highest combined return from fees, interest and token incentives, and it originated with Compound's COMP distribution in June 2020.
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