Skip to main content

​
Impermanent Loss

The difference in value between holding assets and providing them to an AMM liquidity pool when relative prices change.

​
Definition

The difference in value between holding assets and providing them to an AMM liquidity pool when relative prices change.

​
Why it matters

DeFi concepts explain blockchain-based markets, lending, trading, liquidity, and financial automation.

​
How it works

An AMM uses a constant product formula. When prices diverge, arbitrageurs trade with the pool to restore the market price, causing the liquidity provider’s holdings to shift towards the depreciating asset. ‘Impermanent’ means the loss is only realized if the provider withdraws their liquidity while the prices are different from the entry point.

​
Real-world example

Providing liquidity on Uniswap for an ETH/USDC pair during a major rally where ETH prices soar, resulting in less total profit than holding the assets.

​
Advantages

  • Educational risk measurement
  • Helps refine investment strategy
  • Incentivizes stablecoin pairing

​
Limitations

  • Can exceed yield profits
  • Complex for beginners
  • Cannot be fully avoided

​
Common misconceptions

  • People think it only happens when they lose money.
  • Many believe the loss is permanent even if prices return to the original ratio.
Canonical knowledge ID: glossary:impermanent-loss