Impermanent Loss
By Menno — 13 years in crypto, 3 bear markets survived, zero paid promotions
Last updated: March 2026
Impermanent loss is the reduction in value that liquidity providers experience when the price ratio of their deposited token pair changes. The greater the price divergence, the larger the loss compared to simply holding the tokens.
Impermanent loss occurs when you provide liquidity to a decentralized exchange and the price ratio of your deposited tokens changes from when you deposited them.
How it works: 1. You deposit equal value of two tokens into a liquidity pool (e.g., $500 ETH + $500 USDC) 2. The AMM algorithm adjusts your token balances as trades occur 3. If ETH price increases, the pool sells your ETH for USDC (rebalancing) 4. When you withdraw, you have more USDC and less ETH than you deposited 5. Your total value is less than if you had simply held both tokens
Example: if you provide ETH/USDC liquidity and ETH doubles in price, your impermanent loss is approximately 5.7%. At a 5x price increase, the loss reaches about 25.5%.
"Impermanent" because: - The loss only becomes permanent when you withdraw - If prices return to the original ratio, the loss disappears - Trading fees earned may offset the loss
When it's worth it: if trading fees and protocol rewards exceed the impermanent loss, providing liquidity is profitable. This tends to work for stable pairs (USDC/USDT) or correlated pairs (ETH/stETH), but poorly for volatile pairs.
Related Terms
Yield Farming
Yield farming is the practice of earning returns by depositing crypto into DeFi protocols — through lending interest, liquidity provision fees, or protocol reward tokens.
DEX (Decentralized Exchange)
A DEX is a cryptocurrency exchange that operates on a blockchain without a central authority. Users trade directly from their wallets using smart contracts, maintaining custody of their funds. Examples include Uniswap, Jupiter, and Raydium.
DeFi (Decentralized Finance)
DeFi is a category of financial services built on blockchain technology that operates without traditional intermediaries like banks. It includes lending, borrowing, trading, and earning yield through smart contracts.
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