Current Understanding of Impermanent Loss Risk in AMMs

Abstract

This systematic review examines risk of Impermanent Loss (IL) in Automated Market Makers (AMMs) within the Decentralized Finance (DeFi) ecosystem, employing the PRISMA-S methodology. Our comprehensive search across the Web of Science and Scopus databases identified 38 relevant studies published between January 2020 and September 2024. The review reveals a predominant focus on Constant Product Market Makers (CPMMs), which comprise 55.7% of all mentions, underscoring their central role in DeFi markets. There are 9 underlying causes affecting IL risk and the most important ones are price volatility, asset imbalance, and risk/return management. According to our categorization, the most commonly used Mitigation Strategies are Investment Strategies, Decentralized Tools and Technologies, and Design and Management of Liquidity Pool, Hedging Strategies and Context Strategies. IL risk research is calculated equally theoretically and empirically (9 references for each) and there are 6 research papers that calculate in a mixed way. Only 13 research papers employ market data in their reviews and 7.9% of all papers measure IL risk quantitatively. We seek to focus our studies on a more detailed treatment of the risk of IL that will result in improvements to liquidity providers in DeFi.