When providing liquidity to an Automated Market Maker (AMM), in Decentralized Finance (DeFi), investors must deal with impermanent risk. Although it is not an actual loss incurred from the liquidity provider’s (LP) position — rather an opportunity cost that occurs when compared with simply buying and holding the same assets — the possibility of getting less value back at withdrawal is enough to keep many investors away from DeFi.

Impermanent loss is driven by the volatility between the two assets in the equal-ratio pool — the more one asset moves up or down relative to the other asset, the more impermanent loss is incurred. It is possible to minimize impermanent losses by providing liquidity for stablecoins or simply not allowing volatile asset pairs to exist. These strategies may not offer as appealing yields.

Impermanent losses can be reduced by having uneven liquidity pools

Multi-asset liquidity pool are an important step in the right direction

The best choice is single-sided liquidity pools

Automated LP manager can reduce investors’ headaches