🛡️

Risks & Security in DeFi

Learn to identify and mitigate DeFi risks, understand security best practices, and analyze smart contract vulnerabilities

Intermediate • 3-4 hours

8 sections

Progress0%

Chapter Sections

Completed:0/6

Understanding Impermanent Loss

theory•30 min•Section 1 of 8

In Progress

Understanding Impermanent Loss in DeFi

Impermanent loss is a critical concept in DeFi. Learn what it is, why it happens, and how to manage it effectively.

What is Impermanent Loss?

**Definition:** Impermanent loss is the temporary loss experienced by liquidity providers due to volatility in a trading pair, representing the difference between holding tokens versus providing liquidity. **Why "Impermanent"?** • Loss only realized when withdrawing • Disappears if prices return to original ratios • Rarely happens in practice • Can become permanent **Key Mechanics:** • Occurs when token prices diverge • More divergence = more loss • Affects all AMM liquidity providers • Cannot be avoided, only managed

1 of 2

🎯

Key Takeaways

✓IL occurs when LP token prices diverge from initial ratio
✓2x price change equals 5.72% impermanent loss
✓Trading fees can offset IL over time
✓Strategic pool selection minimizes IL impact
✓Understanding IL crucial for successful LP

Estimated time: 30 min

1 / 8

Chapter Glossary

💡Audit

A security review of smart contract code to identify vulnerabilities and ensure safety.

💡Oracle

A service that provides external data to smart contracts, such as asset prices or market information.

💡Bridge

A protocol that enables transfer of assets between different blockchain networks.