What Is Impermanent loss?

Impermanent loss is the temporary decline in value that occurs when a liquidity provider deposits assets into an AMM liquidity pool, compared to simply holding those assets. It arises when the prices of pooled tokens diverge from their initial ratio, causing the AMM’s constant product formula to rebalance holdings in a way that leaves the LP with less value than if they had held the assets outside the pool. The loss is called “impermanent” because it can be reversed if token prices return to their original ratio before the LP withdraws, though in practice losses often become permanent. LPs earn swap fees which can offset impermanent loss in stable or low-volatility markets.

See also

• AMM

• Liquidity provider

• Liquidity pool

• Liquidity provision

• Swap fee

• Bonding curve

• Loss-Versus-Rebalancing (LVR)