Guide · Risk Management
Impermanent Loss: The Cost of Providing Liquidity Nobody Warns You About
Providing liquidity to a pool earns trading fees — but if the two assets' prices drift apart, a provider can end up with less value than if they'd simply held both assets instead.
Impermanent loss happens when the price ratio between the two assets in a liquidity pool changes after a provider deposits them. Because a pool automatically rebalances itself with every trade to maintain its pricing formula, a provider ends up holding relatively more of whichever asset dropped in price and relatively less of whichever one rose — the opposite of what they'd want.
Worked example: deposit $500 of ETH and $500 of USDC into a pool. If ETH's price doubles, the pool's automatic rebalancing means a provider withdraws less ETH and more USDC than they put in — worth less in total than if they'd simply held the original $500 of ETH and $500 of USDC untouched in a wallet the entire time.
It's called "impermanent" because the loss only becomes real (realized) if the provider withdraws while the price ratio is still skewed — if prices return to where they started before withdrawal, the loss disappears. In practice, prices often don't return, which is why the name is somewhat generous.
The trading fees a pool earns can offset or even exceed impermanent loss over time, particularly for pairs that don't move much relative to each other (like two different stablecoins) — but for a volatile pair, the fees frequently aren't enough to make up the difference, which is the actual math worth doing before providing liquidity, not after.