Impermanent Loss

Impermanent loss refers to the temporary loss that occurs to the liquidity provider due to volatility in the trading pair. Impermanent loss is also one of the best ways to project the actual profit one would have made by holding on to the assets instead of liquidating them.

Oftentimes, liquidity pools feature two asset classes, including stablecoins such as DAI and more volatile cryptocurrencies like ETH. Impermanent losses occur when the current value of the asset is lower than that of the real world. The losses can incur permanently, once the amount is withdrawn from the liquidity pool.