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Impermanent loss is the one concept every liquidity provider should understand before depositing. The name sounds scary, but the idea is simple. This page explains it in plain language with a small example.

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The one-sentence version

When you provide liquidity, if the two tokens’ prices move apart, you can end up with slightly less value than if you had just held the two tokens in your wallet. That gap is impermanent loss.
It’s called “impermanent” because the gap shrinks (and can disappear) if prices move back to where they started. It only becomes permanent if you withdraw while prices are apart.

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Why it happens

A liquidity pool automatically keeps its two tokens in balance. When the market price of one token rises, traders buy it from your pool, so the pool ends up holding more of the token that fell and less of the token that rose. You still own your share of the pool, but the mix has shifted toward the weaker performer. The fees you earn as a liquidity provider are meant to make up for this, and often more than make up for it. Impermanent loss is simply the cost side of the ledger.

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A simple example

Suppose you deposit into an ETH / USDC pool:
  • You put in 1 ETH (worth 2,000)∗∗and∗∗2,000USDC∗∗→totaldeposited:∗∗2,000)** and **2,000 USDC** → total deposited: **4,000.
Now say ETH doubles to $4,000. Traders rebalance the pool by buying ETH from it. When you withdraw:
  • You get back roughly 0.7 ETH + 2,800 USDC → about $5,600.
  • But if you had just held your original 1 ETH + 2,000 USDC, you’d have $6,000.
The **400difference∗∗isimpermanentloss.Youstillmademoney(400 difference** is impermanent loss. You still made money (4,000 → $5,600), you just made a bit less than simply holding. And the trading fees you earned along the way offset part or all of that gap.
Key takeaways from the example:
  • You didn’t “lose” money versus your deposit; your 4,000became4,000 became 5,600.
  • You earned less than holding because prices moved apart.
  • Trading fees are the reward that compensates you for taking this on.

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What makes it bigger or smaller

  • Small when the two tokens move together (e.g. two stablecoins, or two closely related assets). Their prices rarely diverge, so loss stays tiny.
  • Bigger when one token swings a lot relative to the other.
  • Bigger for tight Concentrated ranges. Concentrating your liquidity in a narrow price band boosts fees but can increase impermanent loss if the price moves. See Add Liquidity (Concentrated).

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How to manage it

  • Choose pairs that tend to move together if you want lower risk (stablecoin pairs are the classic example).
  • Weigh fees against it. High-volume pools pay more fees, which offsets impermanent loss. Check pool analytics before depositing.
  • Remember it’s impermanent. If you’re not forced to withdraw, prices moving back reduces or erases the gap.

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Bottom line

Impermanent loss isn’t a hidden fee or a bug; it’s the natural trade-off of being a liquidity provider. For many pools, the fees you earn outweigh it. Just go in understanding it, and pick your pools (and, for Concentrated, your ranges) with it in mind.