Understanding Risks & Impermanent Loss

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What is Impermanent Loss?

Impermanent loss (IL) is the difference between the value of your LP position and the value if you had just held your tokens without providing liquidity. It’s called “impermanent” because the loss can reverse if the price returns to where it was when you started. However, if you withdraw your position while the price has moved, the loss becomes permanent.

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How Impermanent Loss Happens on Kuru

When you provide liquidity, you’re placing buy and sell orders across a price range. As traders match against these orders and they flip:

• When MON price goes up: Your position automatically sells MON and collects USDC
• When MON price goes down: Your position automatically buys MON using USDC

The further the price moves from where you entered, the more your position composition changes, and the greater the impermanent loss.

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Simple Example

Let’s say you add liquidity when MON is at $0.025:

• You deposit: 1,000 MON + $25 USDC
• Total value: $50

Scenario 1: MON goes to $0.035 (40% increase)

• Your position has been selling MON as price rises
• You now have: ~714 MON + ~$42.85 USDC
• Total value: ~$67.85
• If you just held: 1,000 MON = $70
• Impermanent loss: ~$2.15

But you also earned fees:

• Fees earned over this period: $3.50
• Net result: +$1.35 profit ✅ (Fees > IL)

Scenario 2: MON drops to $0.015 (40% decrease)

• Your position has been buying MON as price falls
• You now have: ~1,400 MON + ~$15 USDC
• Total value: ~$36
• If you just held: 1,000 MON + $25 USDC =$40
• Impermanent loss: ~$4

But you also earned fees:

• Fees earned over this period: $1.20
• Net result: -$2.80 loss ❌ (Fees < IL)

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Price Range Risk

Beyond impermanent loss, there’s another important risk to understand: If price moves outside your range, your position stops earning fees. When this happens:

• Your orders are no longer matching with traders
• You stop earning fees
• Your position becomes 100% one asset (either all MON or all USDC)

For example:

• You set range: 0.020 - 0.030
• MON price moves to $0.035
• Your position is now 100% USDC and inactive

To start earning again, you’ll need to withdraw and create a new position with an updated price range.

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When is LP Still Profitable?

Even with impermanent loss, providing liquidity can be profitable because you earn fees on every trade. LPing works best when:

• High trading volume - More trades = more fees to offset IL
• Ranging markets - Price stays within your range and oscillates back and forth
• Stable pairs - Less price movement = less impermanent loss (e.g., USDC/USDT, stETH/ETH)
• Your fees exceed your IL - The more fees you earn, the more IL is offset

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Tips to Manage Risk

Here are some ways to reduce your risk when providing liquidity:

1. Start with stable pairs - Pairs like stablecoins or LST/native tokens have minimal price movement
2. Use higher fee tiers - Higher fees mean wider spreads and fewer orders, which creates a wider effective range and reduces IL exposure
3. Monitor your position - Check regularly to see if price is moving outside your range
4. Factor in fees - Remember that fees auto-compound into your position and can offset impermanent loss
5. Start small - Test with smaller amounts first to understand how your position behaves

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Important Reminder

Providing liquidity is not risk-free. You should:

• Only provide liquidity with funds you can afford to have fluctuate
• Understand that your token composition will change as price moves
• Be comfortable with the possibility of impermanent loss
• Consider the fees you’ll earn against potential IL

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