GlossaryAdvanced
Impermanent Loss
A potential shortfall liquidity providers face when pooled asset prices diverge.
Impermanent loss describes the difference in value a liquidity provider may experience between holding assets in a pool versus simply holding those same assets outside the pool, which occurs when the pooled assets' prices move relative to each other.
It's called "impermanent" because the loss exists only on paper unless the provider withdraws while prices remain diverged; if prices return to their original ratio, the loss disappears. See Kaavon's "Liquidity Pool" and "Automated Market Maker" glossary definitions for the mechanism that actually produces this effect.
Examples
- Impermanent loss tends to be larger when the two pooled assets' prices diverge significantly from each other.
- Trading fees earned as a liquidity provider can sometimes, but not always, offset impermanent loss.