What is Impermanent Loss?

What Is Impermanent Loss?

Let’s go through an example and use Uniswap liquidity pool as our base case. When you provide liquidity to an AMM (Automated Market Maker, i.e. decentralized exchange like Uniswap) liquidity pool, you’re depositing a token pair (two different tokens).

  • 1.25x price change = 0.6% loss
  • 1.50x price change = 2.0% loss
  • 1.75x price change = 3.8% loss
  • 2x price change = 5.7% loss
  • 3x price change = 13.4% loss
  • 4x price change = 20.0% loss
  • 5x price change = 25.5% loss

How To Protect Yourself Against Impermanent Loss?

Pools that include tokens with low price volatility have less risk of impermanent loss. The least volatile tokens are stablecoins. At Clip Finance we’re only farming yield from stablecoin pools, i.e. our users are not exposed to impermanent loss.

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