Why is Impermanent Loss, not Permanent Loss?

So, what is Impermanent Loss (IL)?

First of all let’s talk about why IL happens. A market always has 2 assets. Where one asset goes up or down in comparison to the other. Thus if you are providing liquidity with 50% Asset A and 50% Asset B, if the price of Asset A goes up by 5%, your liquidity provider position will be 45% Asset A, and 55% Asset B. Why?

So, why is it not permanent?

The loss is only impermanent due to the fact that price constantly moves and as long as you are still in the liquidity pool, the price could come closer or further away from your entry price.

Now, how is LPing on Uniswap V3 different?

We have a whole article planned for LPing on V3, but in short, LPing on Uniswap V3 is substantially different as you are choosing the price range you want to LP at and with that also choosing the asset allocation ratio you want to start LPing at.

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