Impermanent Loss

Always Remember

Impermanent loss has been described as the difference in the value of your token's value in a liquidity pool versus the value of your tokens if you had held them individually in your wallet. If one of your tokens skyrockets on traditional markets, your assets on SushiSwap do not automatically update to match. At this “time lag” stage, there is an opportunity for traders to buy your assets in the pool at a lower price and resell on a centralised exchange at a higher price, realising an arbitrage gain. That gain could have been yours! Instead, this stolen opportunity can be classified as your impermanent loss. This is one of the risks you take as a Liquidity Provider (LP).

The best-case scenario for an LP is when there are many transactions in the pool and the price of each token does not have significant price fluctuations. The more transactions, the more share of the transaction fees you will earn. So, if you are going to become an LP and earn some yields, it is best to consider the popularity of the pool and your confidence in the price’s stability.