10 Whys to understand Impermanent Loss (IL)
Why IL? Because when you LP with 2 tokens, the AMM sells your better-performing token too early and gives you more of the weaker one when prices move.
Why sell your strong token & buy the weak one? Because the pool needs to rebalance.
Why rebalance? Because AMMs use XYK math (x * y = k), so the product of reserves must stay constant.
Why XYK? Because it was elegant and fast to deploy at first, but flawed.
Why flawed? Because it lets arbitrageurs capture profit.
Why arbitrageurs profit? Because they buy low on DEXs and sell high on CEXs, closing the gap between on-chain and off-chain markets.
Why the gap? Because on-chain prices lag behind off-chain markets.
Why lag? Because blocks are slower than markets.
Why slower? Because everything, even oracles must be decentralized.
Why not fix it? We are. ⚔️🍣
Stay tuned.
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