Impermanent Loss (IL)

Impermanent loss occurs when the price of tokens you’ve provided as liquidity changes relative to when you first deposited them. In a decentralized exchange like OctoSwap, this happens because the automated market maker (AMM) adjusts the ratio of tokens in the pool to maintain balance. As prices fluctuate, the value of your deposited tokens might be lower compared to simply holding them, resulting in an impermanent loss. This loss only becomes permanent if you withdraw your assets while the price difference is significant.

While impermanent loss is a risk for liquidity providers, it can be offset by the trading fees earned from the pool. Strategies like providing liquidity in stablecoin pairs, diversifying across multiple pools, and monitoring market conditions can help mitigate this risk. Understanding impermanent loss is crucial for making informed decisions and maximizing your returns when participating in liquidity pools.