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Impermanent Loss

It is possible to suffer an impermanent loss if the value of tokens stored in an algorithmically balanced liquidity pool declines in relation to assets traded on the open market as a result of price fluctuation. The loss is referred to as ‘impermanent’ since the tokens’ original value may be recovered if the liquidity pool is brought back into equilibrium.

A permanent loss is one that cannot be recovered. For instance, if you use a margin position with leverage and the value of the assets allocated to your position drops too much, so that there is insufficient collateral to cover your debt, you suffer a permanent loss.

Impermanent loss is a kind of unavoidable risk that comes with the liquidity pool model. Since 50% of your assets are committed to automated algorithms, you have to accept the potential for impermanent loss. This is no different than any other form of casino gambling: if you’re playing roulette, the most a bettor can lose in a single period is 100% of his commitment.

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