DefineDeFiWeb3 Glossary

Impermanent Loss

The downside of providing liquidity to trading pools. If prices change a lot, you might end up with less value than if you just held your tokens.

Example

Adding ETH and USDC to a pool at $2000/ETH, then losing 5.7% when ETH rises to $3000 compared to just holding both.

Related Terms

Advanced Concepts
Impermanent Loss ChartShows how impermanent loss increases with price divergenceImpermanent Loss %0%-5%-10%-15%-20%Price Change from Entry-75%-50%0%+100%+200%+400%-50% price= 5.7% ILEntry Point0% IL+100% price= 5.7% IL+400%= 20% ILKey InsightIL occurs in BOTH directions.The more price moves, the worse it gets.Quick Reference±25% → 0.6% IL±50% → 2.0% IL±100% → 5.7% IL±200% → 13.4% IL±400% → 20% IL

⚙️How It Works

  1. 1

    Initial Deposit

    You deposit equal values of two tokens (e.g., $1000 ETH + $1000 USDC)

  2. 2

    Price Movement

    If ETH price rises, arbitrageurs buy cheap ETH from your pool

  3. 3

    Rebalancing

    Your pool now has less ETH and more USDC than before

  4. 4

    Value Comparison

    Compare your LP position to simply holding the original tokens

  5. 5

    Loss Calculation

    The difference is your impermanent loss (it's 'permanent' if you withdraw)

📊Key Numbers

0.6%
25% price change
impermanent loss
2.0%
50% price change
impermanent loss
5.7%
100% price change
impermanent loss
13.4%
200% price change
impermanent loss

🔍Common Misconceptions

✗Impermanent loss only happens when prices go down
✓IL occurs with ANY price change in either direction
✗Trading fees always cover impermanent loss
✓High volatility can cause IL to exceed fee earnings
✗IL goes away if you wait long enough
✓IL only reverses if prices return to your entry point
✗Stablecoin pairs have no impermanent loss
✓Even small depegs between stablecoins cause IL
Browse All Terms