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Impermanent Loss (IL) Meaning

This abbreviation is the standard shorthand used throughout technical documentation and yield farming interfaces. It represents the opportunity cost of providing liquidity in an Automated Market Maker (AMM) compared to simply holding the assets in a private wallet.

Mathematical models are frequently used to predict IL based on percentage price shifts. For example, if one asset doubles in price relative to the other, the liquidity provider suffers a theoretical loss of roughly 5.7% compared to what they would have had if they had just held the two assets separately.

Understanding IL is vital for anyone engaging in "Passive Income" strategies.

While the headline APR of a liquidity pool might look attractive, a high level of IL in a volatile market can result in a net negative return for the provider once they exit their position.

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