> ## Documentation Index
> Fetch the complete documentation index at: https://docs.prigeex.com/llms.txt
> Use this file to discover all available pages before exploring further.

# Impermanent Loss, Explained

**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.

## 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.

## 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.

## A simple example

Suppose you deposit into an **ETH / USDC** pool:

* You put in **1 ETH (worth $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 \*\*$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.

<Note>
  **Key takeaways from the example:**

  * You didn't "lose" money versus your deposit; your $4,000 became $5,600.
  * You earned *less than holding* because prices moved apart.
  * **Trading fees** are the reward that compensates you for taking this on.
</Note>

## 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)](../guides/provide-liquidity-v3).

## 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](../guides/read-the-analytics) before depositing.
* **Remember it's impermanent.** If you're not forced to withdraw, prices moving back
  reduces or erases the gap.

## 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.

## Related

* [Provide Liquidity: Classic vs Concentrated](../guides/liquidity-v2-vs-v3)
* [Read the Analytics](../guides/read-the-analytics)