In plain English
What Impermanent loss means
When one pool asset rises or falls sharply relative to the other, arbitrage traders rebalance the pool. A provider ends up with relatively more of the asset that fell in price and less of the asset that rose. The loss is called impermanent because it can shrink if relative prices return, but it becomes realized when liquidity is withdrawn.
Why it matters
Impermanent loss is a central trade-off in supplying two-sided AMM liquidity. Trading fees, incentives, and price movements jointly determine the final outcome, so a pool’s advertised fee rate alone cannot show whether providing liquidity was profitable compared with simply holding the deposited assets.
Example
Simplified example, excluding fees: deposit 1 ETH worth $100 and 100 USDC. If ETH rises to $200, a constant-product pool rebalances to about 0.707 ETH and 141.42 USDC, worth $282.84. Holding the original assets would be worth $300, so the impermanent loss is about $17.16, or 5.72%.
Quick answers
Common questions
When does impermanent loss become permanent?+
The comparison loss becomes economically realized when the provider withdraws liquidity while relative prices differ from their deposit-time relationship. Even before withdrawal, it remains a meaningful mark-to-market comparison with the alternative of holding the original assets.
Do stablecoin pools have no impermanent loss?+
No. Pools of assets intended to trade near the same value can have lower exposure when the peg holds, but a depeg or divergent prices can create significant rebalancing losses. Pool design and incentives also affect the outcome.
Sources