📉 Impermanent Loss: The Hidden Risk
Learn why liquidity providers can lose money even when fees are earned
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0 / 5 completed📉 What is Impermanent Loss?
Impermanent Loss (IL) is the opportunity cost of providing liquidity to an AMM versus simply holding tokens. When token prices diverge from your deposit ratio, you end up with less value than if you had just held the tokens in your wallet.
Why It Matters
Hidden Cost of LPing
Most new liquidity providers don't realize they're exposed to this risk. It can significantly eat into or even exceed trading fee earnings.
Price Divergence = Loss
The more token prices diverge from your initial deposit ratio, the greater your impermanent loss becomes.
It's "Impermanent"
Loss only becomes permanent when you withdraw. If prices return to initial levels, the loss disappears entirely.
🎮 Interactive: IL Scenarios
Explore how different price movements affect impermanent loss:
Stable Pair
Minimal price movement between tokens (e.g., stablecoin pairs like USDC/DAI)
What This Means:
5% price change results in only ~0.1% impermanent loss
The Basic Concept
If You HODL
Keep 1 ETH + 2000 USDC in wallet. When ETH doubles to $4000, you have $4000 + $2000 = $6000 total.
If You Provide LP
Deposit same amounts to pool. AMM rebalances: you end up with 0.707 ETH + 2828 USDC = $5657 total.
Why This Happens
The constant product formula (x × y = k) forces the AMM to rebalance your position as prices change. You end up selling the winning asset and buying more of the losing asset automatically.
Think of it as automatic profit-taking on the upside...
...but you miss out on further gains if prices keep moving.
Common Misconceptions
"I can't lose money as an LP"
False. IL can exceed trading fees, resulting in net loss compared to holding.
"IL only happens when prices go down"
False. IL occurs with ANY price divergence, up or down. Even 10x gains create IL.
"Trading fees can offset IL"
True. High-volume pairs with good fee APR can make LPing profitable despite IL.