Term
Impermanent loss
Impermanent loss is the difference between holding a pair of tokens and providing them as liquidity to an AMM — when the relative price of the pair changes, the LP position ends up with less value than a simple hold would have.
Impermanent loss is the shortfall a liquidity provider experiences on an AMM when the two tokens they deposited diverge in price. Because AMMs rebalance the pool automatically as trades happen, the LP ends up with more of the token that fell in price and less of the one that rose. Compared to just holding the two tokens outside the pool, they finish with less total value.
The "impermanent" name is misleading. The loss becomes permanent the moment the LP withdraws, and only reverses if the price ratio returns to what it was at deposit. Whether an LP position is net-profitable depends on whether fee income earned during the position exceeds the impermanent loss at exit.
IL is roughly proportional to the square of the price ratio change. A 2x move in one token vs. the other causes ~5.7% IL. A 4x move causes ~20%. For stablecoin pairs (USDC/USDT), IL is near-zero because the tokens barely diverge; for volatile pairs (ETH/random-altcoin), IL can dominate any realistic fee income.
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