Why "Impermanent Loss" is the Most Important Thing
This applies to all projects that allow LP provision, including Magma Finance.
First and foremost, the reason we provide LP is to generate profits.
As mentioned in a previous post, this profit is determined by factors such as APY/APR/incentives.
While LP earnings typically come from fees and incentives, IL is the opposite, as it's used to cover the costs associated with price fluctuations in the coins I deposit.
For example, if you deposit Magma coins and expect an expected LP profit of 100 won, but the price falls by more than 100 won, you'll ultimately incur a loss.
This means that even after depositing a significant amount of fees into the pool, your total assets will decrease.
Beginners who don't understand IL often mistakenly believe they're making a profit.
So why is it called impermanent loss?
In theory, if a volatile asset returns to its original price, the IL can decrease or disappear, which is why it's called "impermanent loss."
❗️However, in reality, losses are often confirmed due to issues such as:
- the price doesn't return,
- the user withdraws before the price returns,
- the incentive expires and the user must exit,
- the market moves more significantly, etc.
I don't often engage in DeFi farming, so there may be errors in my explanation, but I hope you can understand it to some extent.
