Impermanent loss for liquidity providers

Impermanent loss is a risk that liquidity providers face when they provide liquidity to a trading pair on an automated market maker (AMM) platform like Uniswap or SushiSwap. It occurs when the price of the two assets in the trading pair diverge from the original ratio at which the liquidity provider deposited them. This causes the liquidity provider to suffer a loss when they withdraw their liquidity from the pool.

Due to the potential risk of impermanent loss, liquidity providers may be hesitant to provide liquidity to new projects. This is because the price of a new project's token is often highly volatile, and it can be difficult to predict how it will perform in the market. If the price of the new project's token drops significantly after the liquidity provider has deposited their assets, they will suffer a loss when they withdraw their liquidity.

Additionally, new projects often have lower trading volume and lower liquidity compared to more established projects. This means that the risk of impermanent loss is higher for liquidity providers who provide liquidity to new projects. As a result, some liquidity providers may be hesitant to provide liquidity to new projects in order to avoid this risk.