Guide
Impermanent Loss Explained Simply
Bottom line: the "I should have just held" effect
Impermanent loss (IL) is what can happen when you deposit assets into a DeFi liquidity pool: because the pool automatically rebalances as prices move, you may end up with less value than if you had simply held the assets.
Key points
- You deposit two assets as a pair into a liquidity pool
- When one asset's price moves, the pool sells some of it to keep a set ratio
- The gap versus "just holding" is the impermanent loss
- Trading fees can offset it — but there is no guarantee
Why it happens
An automated market maker (AMM) pool keeps a mathematical ratio between two assets and trades automatically to maintain it. If one asset rises, the pool sells it for the other — so you end up holding less of the asset that went up, leaving you worse off than a simple hold.
Why "impermanent"
If the price returns to where you deposited, the loss disappears — hence "impermanent." But if you withdraw while prices have diverged, the loss becomes permanent.
How to reduce it
- Use low-volatility pairs (e.g. two stablecoins)
- Check whether fee income is likely to beat IL
- Don't join pools whose mechanics you don't understand
High yields hide risk
A high "APY" is mostly fees and incentives — IL and smart-contract risk are separate. Never judge by yield alone.
Not financial advice
This article is for information only and is not investment advice. Crypto assets are volatile and carry risks including hacking. Do your own research and only use money you can afford to lose.
FAQ
- What is impermanent loss?
- Impermanent loss is the gap between what you end up with after depositing assets into a DeFi liquidity pool and what you would have had by simply holding them. It happens because the pool automatically rebalances as prices move.
- Why does impermanent loss happen?
- An automated market maker (AMM) pool keeps a mathematical ratio between two assets and trades to maintain it. If one asset rises, the pool sells it for the other, so you end up holding less of the asset that went up.
- Why is it called "impermanent"?
- If the price returns to where you deposited, the loss disappears — hence "impermanent". But if you withdraw while prices have diverged, the loss becomes permanent.
- How can you reduce impermanent loss?
- Use low-volatility pairs such as two stablecoins, check whether fee income is likely to beat the loss, and stay out of pools whose mechanics you do not understand.
This article is informational only and is not financial, investment, or trading advice. Prices are reference snapshots and may be outdated. Always do your own research.
