Impermanent Loss
Impermanent loss is one of the most prominent risks in yield farming and that’s why you should understand how it works. Impermanent loss describes a situation where the liquidity provider (LP) experiences a temporary loss of funds due to the price volatility of the trading pair. It also shows how much money the LP could have realized if they simply held on to their assets instead of locking them in the pool. Straight to the point, it’s the profit or loss difference between simply holding crypto in your wallet vs staking them in an Automated Market Maker (AMM).
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