The loss in value that liquidity providers experience when the price ratio of deposited tokens changes from the initial ratio.
Impermanent loss (IL) is the reduction in value that liquidity providers (LPs) experience when the price ratio of tokens in their liquidity pool changes compared to when they deposited. In an AMM pool, when one token's price rises relative to the other, arbitrageurs rebalance the pool — resulting in the LP holding more of the depreciating token and less of the appreciating one compared to simply holding both tokens. The loss is called 'impermanent' because it reverses if prices return to the original ratio. However, if an LP withdraws at a different ratio, the loss becomes permanent. For a 50/50 pool, a 2x price change in one token results in about 5.7% IL; a 5x change results in about 25.5% IL. Trading fees earned by the pool can offset IL, but in highly volatile pairs, IL often exceeds fee revenue. Concentrated liquidity (Uniswap V3) amplifies both fee earnings and IL risk.
Impermanent loss occurs when providing liquidity to an AMM pool and the price ratio between the deposited assets changes — you end up with fewer of the appreciating asset and more of the depreciating one compared to simply holding both. The 'impermanent' label is misleading: the loss becomes permanent when you withdraw liquidity. For example, if you deposit equal values of ETH and USDC, and ETH doubles in price, the AMM automatically rebalances your position — selling some ETH for USDC to maintain the ratio. You'd end up with less value than if you'd just held both assets separately. IL is most severe with volatile token pairs and during large price moves. Concentrated liquidity positions (Uniswap v3) amplify both trading fee earnings and impermanent loss. Stablecoin pairs (USDC/USDT) have minimal IL since prices stay near parity. To profit from liquidity provision, trading fees earned must exceed the impermanent loss — which depends on trading volume, fee tier, and price volatility.
If you provide $10,000 in ETH/USDC liquidity and ETH doubles in price, impermanent loss means your position is worth about $5,700 less than if you had simply held both tokens separately.
Yes — if the price divergence between your deposited assets is large enough and trading fee income doesn't offset it, you end up with less value than simply holding. The loss is 'impermanent' only if prices return to their original ratio. In practice, significant price moves can create substantial real losses for LPs.