What is impermanent loss?
In one line: Impermanent loss is the value a liquidity provider gives up, compared with just holding the two tokens, when their prices move apart.
The idea in plain words
When you put two tokens into a Liquidity pool, the pool keeps rebalancing them as people trade. If one token rises, traders buy it from the pool. You end up holding less of the winner and more of the other token.
Compare that with simply holding both tokens in your wallet. The gap between the two is impermanent loss. It's called "impermanent" because it shrinks if prices go back to where they started. If you withdraw while they're apart, it becomes a real loss.
A simple example
You put in 1 ETH and 3,000 USDC when ETH costs 3,000. Total: 6,000 USDC.
ETH doubles to 6,000. Two outcomes:
- Just holding: 1 ETH (6,000) + 3,000 USDC = 9,000.
- In a standard 50/50 pool: the pool has sold some of your ETH on the way up. You now hold about 0.707 ETH and 4,243 USDC = about 8,485.
You're still up from 6,000, but about 5.7% behind just holding. That's the impermanent loss, before fees.
| Price change of one token | Loss vs holding |
|---|---|
| 1.25× | about 0.6% |
| 2× | about 5.7% |
| 4× | about 20% |
These are math examples for a standard 50/50 pool, not promises.
Why it matters
Liquidity providers earn trading fees. The pitch often shows only the fee rate. But if the two tokens move far apart, the impermanent loss can be bigger than all the fees earned. With volatile pairs, like a new token against a Stablecoin, it often is.
A common mistake
Looking only at the fee rate. A pool showing a high yearly fee rate usually has a volatile pair inside. High fees and big impermanent loss tend to come together.
Before adding to any pool, run the "what if one side doubles, or halves?" math. Halving gives the same 5.7% loss as doubling.
Questions
Can impermanent loss be avoided?
Not in a standard pool when prices move apart. Pools of two coins that stay close in price, like two dollar stablecoins, see very little of it.
Is impermanent loss a real loss?
It's a loss compared with just holding. It becomes final when you withdraw while prices are apart.
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