In plain English
What Impermanent loss means
When you deposit two tokens into an AMM pool, the pool rebalances your exposure as prices move. If one token rises more than the other, the pool ends up with less of the rising token and more of the weaker one than a simple hold would. Fees can offset this, but they do not guarantee a profit.
Why it matters
Impermanent loss is one of the main risks of providing liquidity. It explains why fee income alone does not tell the full story. To evaluate a pool, liquidity providers need to consider volatility, trading volume, fee tier, and how often the price ratio may move away from the deposit ratio.
Example
Simplified example: you deposit 1 ETH and 2,000 USDC when ETH is 2,000 USDC. If ETH later doubles to 4,000 USDC and you withdraw from a constant-product pool, you may end up with fewer than 1 ETH and more USDC than you started with. The pool position can be worth less than simply holding 1 ETH and 2,000 USDC.
Quick answers
Common questions
Is impermanent loss always a loss?+
It is a loss relative to holding the assets outside the pool. Whether the position is net profitable depends on fees, incentives, and price path.
Can stablecoin pools have impermanent loss?+
Yes, but it is usually smaller when the assets stay close in price. If a stablecoin depegs, the loss can become much larger.
Sources