Impermanent Loss & MEV
When using any DEX—especially as a liquidity provider—it’s important to understand both impermanent loss and MEV (Maximal Extractable Value): what they are, why they matter, and how you can protect yourself.
What is Impermanent Loss?
Impermanent loss happens when you provide liquidity to a pool and the prices of the tokens you deposited change compared to when you deposited them. If the price of one token rises or falls significantly relative to the other, the pool's algorithm automatically rebalances your position. This means the amount of each token you withdraw will likely be different from what you put in—and the total value may be less than if you had simply held the tokens in your wallet.
If you provide equal amounts of ETH and USDC to a pool and ETH's price rises a lot, the pool will automatically sell some of your ETH for USDC to maintain balance. When you withdraw your liquidity, you'll end up with more USDC and less ETH than you started with. If you calculate your total value at withdrawal, it could be less than simply holding both tokens—this difference is your impermanent loss.
If the price of ETH drops instead, the pool will buy more ETH with your USDC, increasing your ETH holdings but reducing your USDC. In both cases, the amounts of each token you receive may be different from your original deposit, depending on how much the price has moved.
How to Minimize Impermanent Loss
Choose Stable Pairs: Provide liquidity in pools where both assets are stable or highly correlated (like USDC/USDT or ETH/wstETH).
Use Concentrated Liquidity (CL AMM): With concentrated pools, you can set your price range closer to the current price, reducing your exposure to large price swings and minimizing impermanent loss. Tighter price ranges mean less risk, but you'll need to monitor your position more actively.
Stay In-Range: Regularly check your concentrated positions and adjust your price range if needed to keep your liquidity "active."
Avoid Illiquid or Extremely Volatile Pools: High volatility means higher risk of impermanent loss.
What is MEV?
MEV (Maximal Extractable Value) refers to profit that can be extracted by others (like validators or bots) by reordering, inserting, or censoring transactions in a block. This can result in front-running, sandwich attacks, or other manipulations that reduce your trade returns or increase costs.
How OctoSwap Protects You from MEV
Built-In MEV Protection: OctoSwap integrates advanced MEV protection directly into the trading interface, powered by Monad's mempool-free design and Atlas (FastLane Labs) technology. By default, you're protected from sandwich attacks. For extra defense against advanced "toxic MEV," enable MEV protection in the settings tab.
User Choice: MEV protection can be toggled on or off—giving you full control.
Best Practices for Safer Trading & LP
For Big Trades: To avoid price impact and reduce MEV risk, break large trades into smaller transactions and space them out over time instead of executing all at once.
Monitor Pools & Positions: Regularly check your liquidity positions, especially if using concentrated ranges.
Review Trade Details: Always check minimum output, slippage, and price impact before confirming.
Educate Yourself: The more you understand, the safer you'll be! Review this guide and explore our resources.
Want to learn more? Check our Trading Guide and MEV Protection page for deeper insights into advanced DeFi strategies.