// GLOSSARY -- DEFI

What is Impermanent Loss?

1 min read Updated

Impermanent loss is the reduction in value that liquidity providers experience when the price ratio of pooled tokens changes compared to simply holding those tokens — a fundamental cost of providing AMM liquidity.

WHY IT MATTERS

Impermanent loss is the hidden cost of liquidity provision. When you deposit ETH and USDC into a pool, the AMM rebalances your position as prices change. If ETH doubles, the pool sells your ETH for USDC — leaving you with less ETH than if you'd just held.

The math: for a 2x price change, IL is ~5.7%. For 5x, it's ~25.5%. The loss is 'impermanent' because it reverses if prices return to the deposit ratio — but in practice, this often doesn't happen.

Trading fees offset IL. The key question: do the fees earned exceed the impermanent loss? For stable pairs (USDC/USDT), IL is minimal. For volatile pairs, fees must be significant to compensate.

FREQUENTLY ASKED QUESTIONS

Can impermanent loss be avoided?
For same-peg pairs (USDC/USDT), IL is near zero. For volatile pairs, concentrated liquidity can manage exposure. Single-sided staking avoids IL entirely but offers lower yields.
How do I calculate impermanent loss?
IL = 2 × sqrt(price_ratio) / (1 + price_ratio) - 1. For a 2x price change: 2×sqrt(2)/(1+2) - 1 ≈ -5.7%. Online calculators make this easy.
Is it really 'impermanent'?
Only if prices return to the deposit ratio. If they don't (common), the loss is permanent. Many in the community argue 'divergence loss' is a more accurate name.

FURTHER READING

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