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Glossary Term

Impermanent Loss

Impermanent loss is the temporary reduction in value experienced by liquidity providers in automated market makers (AMMs) like those on Solana when the price of deposited tokens diverges compared to simply holding the assets, often resolving partially or fully when token prices return to initial ratios.

Beginner
DeFi
Crypto Terminology

Impermanent Loss: what is it?

Examples

  • 1

    Providing SOL and USDC to Orca’s AMM and incurring impermanent loss if SOL’s price surges or drops versus USDC.

  • 2

    Pairing two volatile tokens in a Raydium pool and seeing reduced value if their price divergence increases.

  • 3

    Experiencing smaller impermanent loss with stablecoin pairs (e.g., USDC/USDT) than pure crypto pairs.

Common Use Cases

Yield farming on Solana DEXs by supplying assets to AMM pools.
Participating as a liquidity provider for token launch events or initial DEX offerings (IDOs).
Selecting pools with lower volatility to minimize exposure to impermanent loss.

Pro Tips

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Monitor token volatility before adding liquidity to a pool on Solana's AMMs.

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Use platforms or calculators to estimate potential impermanent loss before depositing.

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Choose liquidity pools with balanced, less-volatile tokens to reduce risk.

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Factor in trading fee rewards when calculating overall yield versus impermanent loss.

Frequently Asked Questions

Related Terms

DAO (Decentralized Autonomous Organization)
Staking
AMM (Automated Market Maker)
Borrowing
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