What is Impermanent Loss?
Impermanent loss is the opportunity cost an AMM liquidity provider incurs when pool prices diverge from the entry ratio: holding the two assets outside the pool would have outperformed. Realized only on withdrawal; recoverable if prices revert.
Modern framing prefers Loss-Versus-Rebalancing (LVR), which measures LP loss against a continuously rebalanced reference portfolio.
How it works
Impermanent loss is the opportunity cost an AMM liquidity provider incurs when pool prices diverge from the entry ratio: holding the two assets outside the pool would have outperformed. Realized only on withdrawal; recoverable if prices revert.
Modern framing prefers Loss-Versus-Rebalancing (LVR), which measures LP loss against a continuously rebalanced reference portfolio.
For deeper protocol-level mechanics, see the related glossary terms below or the linked DeFi Intel topic deep-dive.
Why it matters
IL is the most common loss path for passive LPs and the #1 reason DeFi yields are not free money. Modern LP strategies (CLMM with active rebalancing, just-in-time hedging, Pendle PT) try to neutralize IL.
Real-world examples
A USDC/ETH Uniswap LP underperforming a 50/50 hold by 5-15% during ETH bull runs is the classic IL realization.
Related terms
- AMM (Automated Market Maker)
- Liquidity Pool
- LVR (Loss-Versus-Rebalancing)
- CLMM (Concentrated Liquidity Market Maker)
- JIT Liquidity (Just-In-Time)
Go deeper
Read the full DeFi Intel topic deep-dive or browse the complete crypto glossary.
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