🌵What is Impermanent Loss? Definition: Impermanent loss is the loss part of the loss when a liquidity provider deposits assets into the liquidity pool of the automatic market maker (AMM)/DEX (such as Uniswap, Balancer) because the asset price in the pool fluctuates greatly relative to the external market, and the value when it is finally withdrawn is lower than the loss part when "do nothing, hold it alone". 🐟 Reason: It occurs when prices rise and fall sharply, and arbitrageurs frequently arbitrage by taking advantage of the price difference between the price in the pool and the market price, resulting in your assets being reconfigured. For example, ETH (up 20%), the amount of ETH in the pool is smaller, and the total asset value when withdrawing is less than that of holding coins alone. Give an example 🩷 If you deposit it into the Uniswap pool with 1 ETH + 2000 DAI (ETH at the time $2000). Later, ETH rose to $4,000, and ETH in the pool became less and less, and DAI became more and more. You extract the remaining two items in proportion, and after summarizing, the US dollar is actually less than "holding 1 ETH+2000 DAI alone", which is the loss of impermanence. 🧙‍♀ Why is it called "impermanence"? Because as long as you do not withdraw the assets, this loss is "unrealized". If the market returns to the initial price, the loss will disappear. It only becomes an actual loss when extracted. What is the impact? Can it be avoided? 🐊 Impact: The greater the loss of impermanence, the more severe the market, but the transaction fees earned by liquidity providers can partially or even completely offset this part of the loss. 🩵Avoidance (partial): Select asset pairs with small price fluctuations (such as stablecoin pairs). Some platforms (such as Bancor) provide impermanent loss protection mechanisms to adopt dynamic rates, and increase rewards to compensate for losses. Research on industry views and reality shows that the actual income of more than half of Uniswap LP users after deducting handling fees is less than the impermanent loss of direct holding of coins (especially in bear markets). This is a common and cannot be ignored structural risk in DeFi liquidity mining, and the industry is also constantly innovating the resistance mechanism. 💰🚩Conclusion: While doing the liquidity-provided earning fees, you need to be vigilant about the risk of principal fluctuations caused by impermanent losses. Especially when encountering asset pairs with sharp rise and fall or market fluctuations, strategic choice and risk control are extremely important. #New on Binance Alpha #Difi #Web3 {spot}(ETHUSDT)