APY and Impermanent Loss

APY (Annual Percentage Yield) and Impermanent Loss are two key concepts related to liquidity provision in decentralized exchanges (DEXs) like Uniswap, Sushiswap, and others.

APY is a metric used to measure the annualized rate of return on an investment, including the effect of compounding. In the context of DEX liquidity provision, APY measures the return that liquidity providers (LPs) can earn from providing liquidity to a particular trading pair. It takes into account the trading fees earned by LPs and the value of their LP tokens, which represent their share of the liquidity pool.

Impermanent Loss, on the other hand, is a potential loss that LPs can experience when they provide liquidity to a trading pair with volatile prices. Impermanent Loss occurs when the price of one token in a trading pair changes significantly compared to the other token. This causes the liquidity pool to become imbalanced, and LPs can suffer losses when they withdraw their liquidity.

In the PLIT protocol, Impermanent Loss is avoided for stablecoin providers by forcing projects to absorb the loss that may occur due to price changes in the project's token. This means that if the price of the project's token changes, the project will be responsible for covering the loss, and stablecoin providers will not be affected.