Crypto glossary
Impermanent loss
Impermanent loss is the shortfall a liquidity provider suffers versus simply holding the tokens when their relative prices change inside an AMM pool.
When the price of one token in a pool moves, arbitrage traders rebalance the pool until it matches the outside market. In doing so they leave the liquidity provider with more of the asset that fell and less of the one that rose. Compared with keeping the original tokens in a wallet, the position is worth less.
The loss is called impermanent because it disappears if prices return to where they were when the deposit was made. It becomes permanent once the provider withdraws at a different price ratio. The bigger the price divergence, the bigger the loss, in either direction, and concentrated liquidity positions amplify the effect.
Trading fees and token rewards can offset impermanent loss, so the real question for a provider is whether the income earned exceeds it. Pools of assets that move together, such as two dollar stablecoins, carry little of this risk.
Example
If you add $1,000 to an ETH/USDC pool when ETH costs $2,000 and ETH then doubles, your position is worth about $1,414 before fees, while simply holding would be worth $1,500, an impermanent loss of about 5.7%.
