Impermanent Loss

Impermanent loss is a key risk of providing liquidity.

It happens when the prices of the assets in a liquidity pool move relative to each other. As that happens, the pool automatically changes the mix of assets in your position.

This means your liquidity position may end up worth less than if you had simply held the original assets in your wallet.

Example

You deposit:

• $500 of Token A
• $500 of Token B

If Token A rises significantly in price, the pool may gradually hold less Token A and more Token B as swaps take place.

You may still make money overall, but your position could be worth less than if you had simply held both assets.

That difference is known as impermanent loss.

Concentrated Liquidity

Arrowfarm deploys assets into concentrated liquidity positions.

In these pools, liquidity is provided within a defined price range. While the market price remains inside that range, the position can earn trading fees.

As the price moves through the range, the position gradually shifts from one asset into the other. If the price moves completely outside the range, the position may become entirely composed of one asset and can stop earning fees until it is repositioned.

Concentrated liquidity can increase impermanent loss because liquidity is deployed across a narrower price range. Arrowfarm's automated range management does not eliminate impermanent loss.

The strategy instead seeks to balance:

fees earned + time in range + repositioning costs + market risk.

Trading fees may offset some or all impermanent loss, but there is no guarantee that they will.

Can Fees Offset It?

Yes, potentially.

Liquidity providers earn trading fees, which can help offset impermanent loss. Arrowfarm automatically collects and reinvests those fees when it is economically worthwhile.

However, fees do not guarantee that the position will outperform simply holding the assets.