Impermanent Loss
Impermanent loss is the shortfall a liquidity provider can face compared with simply holding the same tokens, caused by the prices of the pooled assets moving apart. The bigger the price divergence, the bigger the loss.
Why it happens
In a typical automated market maker pool, you deposit two tokens in equal value. The pool keeps rebalancing as traders swap: when one token rises in price, traders buy it from the pool cheaply until the pool's price matches the market. The pool ends up holding less of the token that went up and more of the one that went down.
That automatic selling of the winner and buying of the loser is what creates the gap versus holding.
A worked example
Say you deposit 1 ETH and 2,000 USDC when ETH is worth 2,000 USDC. Your stake is 4,000 USDC. ETH then doubles to 4,000. Had you just held, you would have 6,000 USDC worth. In a standard 50/50 constant-product pool, your share is now roughly 0.71 ETH plus 2,828 USDC, about 5,657 USDC. The difference, around 343 USDC or 5.7 percent, is impermanent loss. Trading fees you earned may cover part or all of it, or none.
Why it is called impermanent
If prices return to where they were when you deposited, the loss disappears. It becomes permanent the moment you withdraw while prices are still apart. The name is somewhat misleading, because in practice prices often do not return, and many providers realize the loss.
Risks and how people manage them
Impermanent loss is largest in pools of volatile tokens that move independently. Pools of two stablecoins pegged to the same currency usually see little of it, unless one loses its peg. Concentrated-liquidity pools can earn more fees but magnify the effect when the price leaves your chosen range.
Before providing liquidity, compare the fee income you might realistically earn with the loss you would take under different price moves, and remember smart-contract risk comes on top.
Ask Coach about it
Coach is the AI on AtenaCrypto. It explains crypto with live market data, in plain words.
How can I compare expected trading fees with possible impermanent loss before joining a liquidity pool?Ask Coach →
Frequently asked questions
Can impermanent loss make me lose money overall?
Yes. If the impermanent loss is larger than the fees and rewards earned, and the tokens also fall in value, you can end up with less than you deposited.
Does impermanent loss happen when prices fall too?
Yes. It depends on how far the two prices move apart relative to each other, in either direction, not on whether the market goes up or down.
Is impermanent loss the same as a liquidation?
No. Nothing is forcibly closed. It is the difference between your pool position and simply holding the same tokens.
Related terms
Learn it step by step
AC Learning explains these ideas in interactive lessons — the first eight sections are free.
Open AC Learning → Create a free accountAll glossary terms · Educational reference only — not investment, legal, tax or financial advice.