Paper 2026/1073
SoK: Impermanent Loss, An Unavoidable Fee or a Controlled Phenomenon?
Abstract
Decentralized exchanges built on Automated Market Maker (AMM) protocols have become a cornerstone of Decentralized Finance (DeFi), offering token swaps without conventional order-book matching. However, supplying liquidity to these AMM pools exposes participants to distinctive market risks, most notably impermanent loss (IL) - the potential underperformance of a liquidity-provider portfolio relative to simply holding the underlying tokens. This paper presents a comprehensive overview of IL, unifying its main theoretical models, empirical evidence, and mitigation strategies. Our survey spans constant-function and concentrated liquidity market makers, synthesizes findings from leading DeFi protocols, and reviews mitigation methods that include both protocol-level adaptations and financial-engineering approaches. Across these perspectives, we highlight recurring trade-offs, cost, complexity, and security. Finally, we outline open questions for managing IL's systemic effects, keeping decentralized liquidity provision both profitable for participants and sustainable for the broader ecosystem.
Metadata
- Available format(s)
-
PDF
- Category
- Applications
- Publication info
- Published elsewhere. Minor revision. IEEE International Conference on Blockchain and Cryptocurrency (ICBC)
- Keywords
- BlockchainDecentralized Finance (DeFi)
- Contact author(s)
-
aradk @ campus technion ac il
or @ technion ac il - History
- 2026-05-31: approved
- 2026-05-27: received
- See all versions
- Short URL
- https://ia.cr/2026/1073
- License
-
CC BY
BibTeX
@misc{cryptoeprint:2026/1073,
author = {Arad Kotzer and Ori Rottenstreich},
title = {{SoK}: Impermanent Loss, An Unavoidable Fee or a Controlled Phenomenon?},
howpublished = {Cryptology {ePrint} Archive, Paper 2026/1073},
year = {2026},
url = {https://eprint.iacr.org/2026/1073}
}
