Impermanent Loss Amplification
The heightened risk of value loss for liquidity providers when using concentrated positions, exacerbated by price movements outside specified ranges.
What is Impermanent Loss Amplification?
In concentrated liquidity, impermanent loss (IL) is magnified because tight ranges, like 1% around the market price, can lead to 100% loss of one asset if prices shift just 1%. For example, a USDC/ETH position at $4,500 loses fully if ETH hits $4,545, compared to milder losses in uniform pools.
This amplification arises from the dilemma: narrower ranges boost fees (up to 10x) but increase IL sensitivity, as arbitrageurs exploit divergences. Studies show v3 positions suffer 2-3x higher IL than v2 during volatility.
Mitigation strategies include active rebalancing or tools like Amberdata’s IL calculator, which factors liquidity distribution for precise risk assessment.
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