We believe that this will be the start of Crypto 2.0. – the true institutionalisation of digital asset products.”

The term impermanent loss became widespread with the very insightful articles by Pintail. If you never heard the term before, please take a read at his important article about returns on Uniswap pools.

By definition, impermanent loss (IL) describes the percentage by which a pool is worth less than what one would have if they had instead just held the tokens outside of the pool.

Liquidity pools directly address this problem by removing the dependence of tokens on trade volume and ensuring constant liquidity. Compared to the traditional order book model, liquidity pools have four main advantages:

1. Guaranteed liquidity at every price level
2. Automated pricing enables passive market making
3. Anyone can become a liquidity provider and earn
4. Lower gas fees

"yPools are considered more risky as you use a series of protocols that could themselves have critical vulnerabilities."

talks about chaining liquidity tokens

Flash swaps remove capital as a barrier entirely, effectively democratizing arbitrage.

"Alright, so this sounds a lot more complicated than a regular exchange with a normal limit order book. The premiums also make it prohibitively expensive for whales to transact large size. So what is so great about this style of exchange? In a nutshell, the pooled liquidity smooths out the depth of the order book. There are no more large holes or large bid/ask spreads. This is preferable for small traders who don’t want to have to deal with limit order books (the Uniswap UX is one of the slickest we’ve seen in all of crypto). No more having to make bids or offers or doing heavy calculations. Liquidity providers can also “set it and forget it.” There’s significantly less overhead in terms of management of orders and positions. It’s an incredibly passive way to provide liquidity and earn some fees."