Impermanent loss is a temporary loss in value that liquidity providers (LPs) experience when they deposit assets into an automated market maker (AMM), such as Uniswap or SON-swap, and the prices of those assets change compared to when they deposited them.

How It Happens:

1. When you provide liquidity to a pool (e.g., ETH/USDC), you are required to deposit equal value of both tokens.

2. If the price of ETH changes significantly while your funds are in the pool

3. The AMM automatically rebalances the pool.

4. You end up with more of the lower-value asset and less of the higher-value one.

5. If you had just held the assets in your wallet instead of providing liquidity, you might have had more value.

Why It's Called "Impermanent" include:

1. The loss is only realized when you withdraw your funds.

2. If the asset prices return to their original state before you withdraw, the loss disappears.

3. But if prices remain changed, the loss becomes permanent upon withdrawal.

For  Example:

1. You deposit 1 ETH ($2,000) and 2,000 USDC into a pool.

2. Later, ETH rises to $3,000.

3. The AMM rebalances the pool to maintain a 50/50 value ratio.

4. When you withdraw, you now have less ETH and more USDC.

5. If you calculate your total, it will likely be less than what you'd have if you simply held the ETH and USDC.

When It Matters:

1. Small price movements cause minor impermanent loss.

2. Large price divergences result in greater impermanent loss.

3. It's often offset by the trading fees earned by LPs—but not always.

Key Takeaway:

Impermanent loss is a risk for liquidity providers in DeFi. It’s crucial to understand how volatile the assets are and how much trading volume (and thus fees) the pool generates to determine if providing liquidity is worthwhile.

I hope you learn something new 

Good luck 🫶