Divergence loss


The loss produced by providing tokens as liquidity to an AMM instead of just holding them, if the tokens diverge in price. Divergence loss is the difference between the value of an LP position vs the same account holding fixed amounts of those same tokens


By providing liquidity an investor hopes to be rewarded with a high APY


Divergence loss is a risk that one is exposed to when providing liquidity on an AMM. For example if you provide liquidity on a pair and people sell a high amount of one token, the pools becomes imbalanced and the investor may end up with a worthless token and a lesser amount of the more valuable token pair


Protocols typically give out rewards/yield to counterbalance the risk, which often, but not always makes up for the divergence loss suffered.

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