What is Impermanent Loss?

Impermanent loss is a subtle cost of providing liquidity. When the prices of the two tokens in a pool move apart, the automated rebalancing leaves you with a value lower than if you had just held the tokens. It is called impermanent because the gap can shrink if prices return to their original ratio, but it becomes permanent once you withdraw.

This matters because it can quietly erode or erase the fees you earn from a pool, and many newcomers overlook it when chasing yield.

Example: you provide liquidity for a token pair, one token then doubles in price, and when you withdraw you find your position is worth less than if you had simply kept both tokens.

Safety note: fees and reward incentives must outweigh impermanent loss for liquidity providing to be worthwhile, which is not guaranteed, especially for volatile pairs. Pools of two closely correlated assets, like two stablecoins, tend to suffer less. Understand this risk before providing liquidity, and do not assume a high advertised yield automatically compensates for it. Related terms include liquidity pool, yield farming, stablecoin, and DEX.