What is Impermanent Loss?
Last reviewed 2026-05-03
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 follows mechanically from how an AMM rebalances. When you deposit into a constant-product pool you supply equal values of two assets. As the market price moves, arbitrageurs trade against the pool until its price matches — and every one of those trades sells the pool's appreciating asset and accumulates the depreciating one. Your position is therefore always drifting toward more of whatever is falling in relative value.
Walk through the classic example: deposit 1 ETH and 2,000 USDC when ETH is $2,000. If ETH doubles to $4,000, arbitrage leaves the pool holding roughly 0.707 ETH and 2,828 USDC for your share — about $5,657. Simply holding would be worth $6,000. The ~5.7% gap is the impermanent loss at a 2× price move (it grows with divergence: roughly 2% at 1.5× and 25% at 5×).
The loss stays "impermanent" because if the price returns to your entry ratio, the pool composition drifts back too. It becomes permanent the moment you withdraw. Trading fees accrue against it, so an LP profits only when fees earned exceed divergence loss over the holding period.
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)
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Browse GlossaryFrequently asked questions
What is impermanent loss in DeFi?
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. It is realized only on withdrawal and recoverable if prices revert.
How does impermanent loss work in a constant-product pool?
When you deposit equal values of two assets, arbitrageurs trade against the pool as market prices move, selling the appreciating asset and accumulating the depreciating one. Your position drifts toward more of whatever is falling in relative value.
What is the impermanent loss percentage for a 2x price move?
The impermanent loss at a 2x price move is roughly 5.7%, as shown in the classic example where depositing 1 ETH and 2,000 USDC at $2,000 ETH results in about $5,657 versus $6,000 from holding.