Impermanent Loss

Turn your loss to assets...

What Is Impermanent Loss?

Impermanent loss describes the temporary loss of funds occasionally experienced by liquidity providers because of volatility in a trading pair.

This also illustrates how much more money someone would have had if they simply held onto their assets instead of providing liquidity.

Liquidity pools often feature two assets — and while one might be a stable coin such as KUSD-T, the other could be a more volatile cryptocurrency such as DFL.

How did it happen?

Let’s imagine that a provider needs to offer equal levels of liquidity in both KUSD-T and DFL — but suddenly, the price of DFL goes up.

This creates an irresistible opportunity for arbitrage because the price of DFL in the liquidity pool now doesn’t reflect what’s going on in the real world. To ensure the ratio of KUSD-T to DFL remains balanced, other traders will buy DFL at a discounted rate until there’s equilibrium again.

After arbitrage, a liquidity provider may end up with a greater amount of KUSD-T and slightly less DFL. Impermanent loss assesses the current value of their assets against what they would be worth if left sitting pretty in an exchange. It's not as bad as it sounds (especially if you like both of the assets on the LP pair). If you hold KUSDT-DFL LP tokens and DFL goes down in price, if you withdraw liquidity, you will just have more DFL -- YAY... you will have suffered a little bit of impermanent loss on KUSDT in exchange for that -- big deal! You're now a few dragons richer!

The loss only becomes permanent if a provider decides to withdraw their liquidity for goods.