Impermanent loss is a risk faced by people who provide funds to a liquidity pool. It describes the situation where, because the prices of the pooled tokens change, the value of your deposit ends up lower than if you had simply held the tokens on their own.
The effect happens because pools automatically rebalance as trades occur. When one token rises or falls sharply relative to the other, the pool ends up holding more of the weaker asset. The loss is called impermanent because it can shrink if prices return to their original ratio, but it becomes real if you withdraw while the gap remains.
Understanding impermanent loss is important for anyone learning about liquidity provision, because trading fees earned may or may not offset it. This entry explains the concept so the risk is clear; it is not advice to provide liquidity.
Frequently Asked Questions
Why is it called impermanent loss?
Because the loss can shrink or disappear if the token prices return to their original ratio. It becomes permanent only if you withdraw while the price gap remains.
Can trading fees offset impermanent loss?
Sometimes. Fees earned from the pool may partly or fully offset it, but there is no guarantee, and in some cases impermanent loss can outweigh the fees earned.
