Understanding Impermanent Loss: The Hidden Risk of DeFi Liquidity

Impermanent loss, a core concept in decentralized finance (DeFi), can impact liquidity providers by reducing their earnings compared to holding the same assets directly. This occurs when asset price ratios shift within liquidity pools, leading to potential capital losses. While this phenomenon is often misunderstood, it’s crucial for DeFi users to comprehend its mechanics and associated risks.