When you supply a liquidity pool, the automated pricing formula constantly rebalances your two tokens as people trade against it. If one token rises sharply in price, the mechanism effectively sells some of the winner and accumulates more of the other. The result is that your pooled stake can be worth less than if you had just held the original two tokens untouched. That gap is impermanent loss.
The word impermanent is important and a little misleading. The loss is only on paper while the price gap persists; if the tokens return to their original ratio, it disappears. But if you withdraw while prices are far apart, it becomes very real and permanent. Fees earned from the pool can offset it, and sometimes outweigh it, which is the whole reason providing liquidity can still be worthwhile.
This is genuinely advanced territory. It is easiest to underestimate impermanent loss when a volatile token moons, and pairs of very different assets are more exposed than pairs that tend to move together, such as two stablecoins. Anyone considering providing liquidity should understand this trade-off first; it is education, not advice. Calculators exist to estimate it for a given pair and price move, and running the numbers before committing is far wiser than discovering the effect after the fact.
DeFi Basics and Risks
Key takeaways
- Impermanent loss is the value gap between providing liquidity and simply holding the two tokens.
- It grows when the pooled tokens diverge in price and shrinks if they return to their original ratio.
- Trading fees can offset it, but withdrawing while prices are far apart makes the loss permanent.
Impermanent Loss — preguntas frecuentes
Why is it called impermanent?
Because the loss exists only while the two tokens' prices are apart. If they return to their starting ratio, it vanishes. It becomes permanent only if you actually withdraw while the divergence remains.
Can fees make up for impermanent loss?
They can, and that is the point of providing liquidity. Whether the fees outweigh the loss depends on trading volume and how much the tokens diverge, so it is never guaranteed to come out ahead.
Related terms
Liquidity PoolAutomated Market Maker (AMM)Yield FarmingStablecoinVolatilidad Todos los términos →New to crypto, or filling in the gaps? Work through the essentials in Learn, browse every term A–Z, or see live prices for the coins these concepts power.