Technical Definition
Impermanent Loss
The shortfall a liquidity provider suffers when the two pooled assets change in price relative to each other.
By Crypto University Editorial
Liquidity Pool · Automated Market Maker (AMM) · Concentrated Liquidity · APY (Annual Percentage Yield) · Yield Farming
✦ Key Insight
It is the main reason a headline yield on a pool can still leave you worse off than holding the two tokens in your wallet.
✕ Common Misconceptions
Comparing pool returns against zero rather than against holding the assets. The correct benchmark is what you would have had if you had never deposited.
Detailed Explanation
When one asset in a pool rises against the other, arbitrage traders buy it out of the pool. You end up holding more of the weaker asset and less of the stronger one than if you had simply held both. The loss is called impermanent because it reverses if prices return to their original ratio — which frequently they do not.
In Practice
“A provider deposits into a volatile-token pool, earns fees for a month, and finds the position worth less than if the same two tokens had been held untouched, because one token rose sharply against the other.”