Glossary
What is impermanent loss?
In one sentence
Impermanent loss is the shortfall liquidity providers suffer when the assets they deposited change in price relative to each other. The name understates it.
When you provide liquidity to a decentralised exchange you deposit two assets. As people trade against your pool, its composition shifts: if one asset rises, the pool sells it, leaving you holding more of the one that fell.
The result is that you end up with less value than if you had simply held the two assets. That difference is impermanent loss.
The name is misleading and causes real harm. It is called “impermanent” because it reverses if prices return to their original ratio — but there is no reason they must, and the moment you withdraw, the loss is realised and entirely permanent. Many providers have discovered this after the fact.
Trading fees earned may offset it, which is the actual bet you are making: that fee income exceeds the divergence. In volatile pairs it frequently does not. Pairs of assets that move together, such as two stablecoins, have far less exposure — which is why those pools pay less.
For example
If one asset in your pair doubles and the other does not move, you will hold less value than if you had done nothing.