Impermanent loss occurs when the price of a token in a liquidity pool deviates from its price on the open market. Called “impermanent” because the loss is temporary if prices return — but in practice it often becomes permanent.
How It Happens
You deposit 1 ETH and 1000 USDC into a pool. If ETH doubles in price, arbitrageurs buy your cheap ETH from the pool until the ratio balances. You’ll end up with less ETH and more USDC than you started with.
Example: You deposited $2000 worth (1 ETH + 1000 USDC). After ETH doubles, you withdraw: 0.7 ETH + 1400 USDC. You lost 0.3 ETH compared to just holding — ~$200 loss.
How Big Is It?
- 25% price change → ~1% impermanent loss
- 50% change → ~2-3%
- 100% change (2x) → ~6%
- 400% change (5x) → ~20%
How to Avoid
Choose pools with stablecoins (USDC/USDT/DAI) where impermanent loss is minimal. Or use protocols offering IL protection.
Disclaimer: This is not financial advice. Always do your own research.