What is impermanent loss?#

Impermanent loss is the difference between the value of an AMM liquidity position and the value of simply holding the same starting tokens. It arises when relative prices change and arbitrage rebalances the pool. The loss can shrink if prices return, but it becomes realized when you withdraw.

How it works in v2#

A CenturionDEX v2 pool maintains x · y = k. When the external market price changes, arbitrage trades alter the pool reserves until its ratio reflects the new price. A liquidity provider therefore ends with more of the asset that fell in relative value and less of the asset that rose.

For a standard equal-value v2 deposit, if one token's relative price doubles, the position underperforms holding by about 5.7% before pool fees and network costs. This is an illustrative mathematical comparison, not a prediction of either token's price.

Fees earned from swaps can offset some or all of that difference, but they are not guaranteed to do so.

How v3 changes the exposure#

CenturionDEX v3 concentrates liquidity inside a selected range. This can earn more fees per unit of capital while the position is active, but it also increases sensitivity to price movement.

As price moves through the range, the position converts toward one token. Once out of range, it holds only one side and stops earning fees until price returns. A narrow range can therefore experience greater relative underperformance and require more active management than full-range v2 liquidity.

Worked example#

You deposit equal values of CTN and a CRC-20 token. Later, CTN rises substantially relative to the token.

A holder keeps the original quantities.
The pool position sells some CTN into the rising market and accumulates more of the other token.
The position may still be worth more than at deposit, yet be worth less than the hold strategy.

That difference is impermanent loss. It is distinct from an outright loss caused by both tokens falling in value.

How to manage the risk#

Choose pairs whose relative behavior you understand.
Compare expected fee activity with volatility and concentration.
Use wider v3 ranges when you prefer less frequent rebalancing.
Monitor whether a v3 position is in range.
Include approval and Newton costs in performance calculations.
Do not treat historical fees as guaranteed future income.

Common misconceptions#

“It only matters when I withdraw”: the economic difference exists while the position is open, even before realization.
“Fees remove all risk”: fees may be insufficient.
“Stable symbols mean stable value”: token contracts and market backing must still be verified.
“Out of range means lost”: the v3 position still owns assets, but it is inactive.