Quick answer
Impermanent loss is the relative underperformance a liquidity provider can experience compared with simply holding the deposited assets.
What is Impermanent loss?
Impermanent loss occurs when the prices of assets in a liquidity pool move relative to each other, changing the pool’s rebalancing outcome. It may be offset by fees, but the loss is not automatically recovered.
The useful way to approach this term is to separate its definition from the assumptions people often attach to it. In crypto, the same word can appear in a protocol rule, a user interface, a market-data label, or a marketing claim. Check which layer the explanation is describing.
Why does impermanent loss matter?
A pool can show attractive fee income while the provider still ends with less value than a hold-only comparison. Concentrated-liquidity ranges can make the exposure more active and more sensitive to price movement.
Concrete example
See it in a real situation
A provider deposits equal values of ETH and a token. If the token doubles relative to ETH, arbitrage changes the pool’s mix, leaving the provider with a different asset balance than a passive holder would have had.
Common misconceptions
What this term does not mean
- Impermanent loss is not limited to assets that fall in price; relative price movement is the key factor.
- The word impermanent does not mean the loss will definitely disappear.
Related terms
Sources and further reading
Definitions are written for education and checked against the sources below where relevant. A source can explain a protocol or rule without endorsing every product built around it.