Note on AMMs “picked-off” risk
AMMs picked-off risk Note on AMMs "picked-off" risk It has been popularized the term "Impermanent loss" (IL) to refer to costs incurred by liquidity providers (LPs) of an AMM pool in the case relative market prices change, and those changes are profited out by arbitrageurs. This Twitter thread by @AnthonyLeeZhang and @guil_lambert discuss that a more appropriate term for this loss is "picked-off" risk. In my understanding (thanks to discussions with Javier Garcia Sanchez), IL is not the best term and below are my notes of why. IL is also referred as an "opportunity cost", meaning that LPs would have been better staying out of the AMM in such a case. I tend to think that the term "opportunity cost" idea is neither adequate. It is my understanding that "picked-off risk" or "picked-off loss" are right terms. As mentioned, this situation takes place when: i) the relative prices of the assets of interest (i.e., those in the pool) change outside the AMM (in the "market" or centralized exchange of reference), and ii) an arbitrageur takes advantage of the price differential (between the one provided by the AMM and market) to obtain a benefit. My understanding is that this is indeed…