Impermanent loss
Impermanent loss is the shortfall a liquidity provider in an AMM pool suffers versus simply holding the same tokens, caused by the tokens' prices moving apart.
How it works
When you deposit two tokens into a pool, the AMM keeps rebalancing your share. If ETH rises, the pool sells some of your ETH to arbitrage traders on the way up, so you end with less ETH and more USDC. Simply holding both tokens would have done better.
It is called impermanent because it disappears if prices return to the original ratio. If you withdraw at a different price, it becomes very real. Direction does not matter: one token rising or falling against the other gives the same loss. A 2x change in the ratio costs about 5.7%, a 5x change about 25%.
Trading fees paid to liquidity providers are supposed to make up for it. Stablecoin-to-stablecoin pairs carry little risk, volatile pairs carry a lot, and concentrated liquidity pools can amplify it.
You deposit 1 ETH and 3,000 USDC at $3,000, worth $6,000. ETH rises to $6,000. Your share of the pool is now ~0.707 ETH and ~4,243 USDC, about $8,485. Holding would be worth $9,000. The ~$515 gap (5.7%) is impermanent loss before fees earned.
A common mistake is looking only at a pool's high APR and ignoring impermanent loss. A 40% APR pool on a volatile pair can return less than just holding. Before adding liquidity, estimate how far the prices could drift and weigh that loss against expected fees.
Questions and answers
What is impermanent loss in simple terms?
It is earning less in a liquidity pool than you would by just holding the same tokens. It happens because the pool sells the rising token and buys the falling one.
Why is it called impermanent?
It goes away if prices return to where they were when you deposited. If you exit at different prices, the loss is locked in.
Can you avoid impermanent loss?
Not fully, as long as the prices in the pair change. The risk is lower for stablecoin pairs or tokens that move together.
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Updated: 2026-10-19