Impermanent loss is a risk if you provide liquidity into a liquidity pool. Essentially you lose tokens when one coin of the pair is increasing in value.
This can be mitigated by farming rewards. It is impossible to predict if it is enough to cover losses from IL and is the risk you take for being an LP provider.
Example:
If ETH skyrockets, you will lose ETH but gain more of the other token. Rewards are the hedge. However, if both tokens increase equally in value, there will be no IL.
IL is a result of rebalancing the pair.
1) It's a loss compared to just HODL, so it is just a potential loss of gains.
2) IL is, to a large degree, offset by trading fees you receive, especially over a prolonged period.
3) IL is a more considerable risk in prolonged trends and a short term period. IL is non-existent mainly when considering a long term perspective.
4) Here is a table that will help you calculate IL:
1.25x price change = 0.6% loss
1.50x price change = 2.0% loss
1.75x price change = 3.8% loss
2x price change = 5.7% loss
3x price change = 13.4% loss
4x price change = 20.0% loss
5x price change = 25.5% loss
5) If you want to cut your IL in half, use a stable coin pair and not an ETH pair.
Click here for more info about IL on Binance Academy.
