Impermanent Loss (IL)

When users provide assets to a liquidity pool and the price of the assets change, the pool composition also changes. As the pool composition shifts, users often end up having less total value than if they had never provided liquidity in the first place. Since such a loss is realized when users redeem liquidity tokens - this loss of value is called impermanent loss.

Factors That Impact Impermanent Loss:

  • Volatility: Volatility increases fees earned from trading but creates more risk of impermanent loss.
  • Liquidity Concentration: Concentrated liquidity provides IL risk when the LP positions jump out of the determined price ranges.
  • Uneven Pools - Price volatility creates a lower risk of IL when the asset ratio exceeds 50%.
ICHI's Vaults manage concentrated liquidity positions to allow users to mitigate impermanent loss while benefiting from higher trading fees.