Understanding Impermanent Loss

Understanding Impermanent Loss

Impermanent loss (IL) is the difference between holding tokens in a liquidity pool versus simply holding them in your wallet. It occurs when the price ratio of pooled tokens changes from when you deposited them.

How Does It Happen?

AMMs rebalance your position as prices change. If ETH rises 100%, an ETH/USDC LP position gains less than simply holding ETH, because the pool automatically sells ETH as it rises. The "loss" is "impermanent" because it reverses if prices return to the original ratio.

IL by Price Change

How to Minimize IL

• Stablecoin Pairs: Pools with correlated assets (USDC/USDT) have minimal IL.
• High Fee Pools: Trading fees can offset IL if volume is sufficient.
• Concentrated Liquidity: Narrower ranges earn more fees but amplify IL.