About Lesson
Frankly, impermanent loss isn’t a great name. It’s called impermanent loss because the losses only become realized once you withdraw your coins from the liquidity pool. At that point, however, the losses very much become permanent. The fees you earn may be able to compensate for those losses, but it’s still a slightly misleading name.
Be extra careful when you deposit your funds into an AMM. As we’ve discussed, some liquidity pools are much more exposed to impermanent loss than others. As a simple rule, the more volatile the assets are in the pool, the more likely it is that you can be exposed to impermanent loss. It can also be better to start by depositing a small amount. That way, you can get a rough estimation of what returns you can expect before committing a more significant amount.
One last point is to look for more tried and tested AMMs. DeFi makes it quite easy for anyone to fork an existing AMM and add some small changes. This, however, may expose you to bugs, potentially leaving your funds stuck in the AMM forever. If a liquidity pool promises unusually high returns, there is probably a tradeoff somewhere, and the associated risks are likely also higher.
