What is an Impermanent Loss?

The impermanent loss is the value difference between the equivalent amount of tokens, i.e. 100 EOS and 300 USDT, the value of holding in the wallet vs the current token value when you use Swap to perform market making.

Let's see a simple example:

When 1 EOS = 3 USDT, you hold 100 EOS and 300 USDT.

① If you hold it in your wallet, your current value is 100 x 3 + 300 = 600 USDT

② If you perform AMM in Swap, and the current value is also 100 x 3 + 300 = 600 USDT

Now, imagine the price of EOS suddenly soared to 5 USDT.

① You hold it in the wallet, and the current value becomes 100 x 5 + 300 = 800 USDT

② You are in Swap, assuming that the current change is 80 EOS and 375 USDT, then the current value becomes 80 x 5 + 375 = 775 USDT

Compared with simply holding in the wallet, there is a total of 800-775 = 25 USDT less; this 25 USDT is the impermanent loss, also called temporary loss.

Why is it called impermanent loss? (Temporary loss)

Because as the token price rises and falls, if EOS falls from 5 USDT back to 3 USDT, then you will have no market-making losses at all, and you will also earn market-making fees. So your loss is only temporary.

But if you cancel the market making when EOS rises to 5 USDT, then the loss incurred at this time is a permanent loss. Because if EOS falls from 5 USDT back to 3 USDT, but you are no longer in the market making, the value you lost will never return, and this time is called permanent loss.