What Is Impermanent Loss?
Impermanent loss is what AMM liquidity providers experience when the prices of pooled assets diverge from their ratio at deposit time. The 'loss' is relative to simply holding the assets outside the pool — not a literal dollar loss, but an underperformance versus the buy-and-hold counterfactual.
Math: if you deposit equal $1,000 of ETH and USDC and ETH then doubles, the constant-product rebalancing leaves you with less ETH and more USDC. Your total position is worth more than $2,000 but less than what you'd have by just holding the original ETH stake. The gap is impermanent loss.
It's 'impermanent' because if prices return to the deposit ratio, the loss reverses. In practice, large price moves rarely fully reverse, so impermanent loss is usually permanent. LPs profit only when fees earned exceed the impermanent loss — which makes high-volume, low-volatility pairs much more attractive to LP than the meme coins everyone wants to provide for.
Related terms
- AMM (Automated Market Maker) — Smart contract that lets users trade against a pool of assets without counterparties.
- DeFi (Decentralized Finance) — Financial applications built on blockchain without traditional intermediaries.
- Liquidity — The ease with which an asset can be bought or sold without significantly affecting its price.
- Stablecoin — A cryptocurrency designed to maintain a stable value, usually pegged to USD.