WHAT'S IMPERMANENT LOSS IN TRADING?
Impermanent loss is the temporary reduction in the value of assets provided as liquidity to a decentralized finance (DeFi) liquidity pool compared to simply holding them.
Go Back
🕒 1:52 AM
📅 Dec 03, 2025
✍️ By Iceprince
It happens when the price of the assets in the pool changes from the time they were deposited. This loss is called "impermanent" because it is not realized until the assets are withdrawn and can disappear if the prices return to their original ratio.
How it happens
1. Liquidity pools: These are pools of two or more tokens that allow users to trade assets on a decentralized exchange (DEX).
2. Price divergence: When the price of one asset changes relative to the other in the pool, the pool's algorithm adjusts the balance of the two assets to maintain the pool's pricing, which causes impermanent loss for liquidity providers (LPs).
3. Greater price movement, greater loss: The larger the price difference between the two assets from the time of deposit to withdrawal, the greater the impermanent loss will be.
4. Realization: The loss only becomes permanent if you withdraw your assets while their value has changed.
Key takeaways
1. It is a potential risk of providing liquidity to AMM platforms.
2. It represents an opportunity cost—the difference in value between holding the assets and providing liquidity.
3. The loss can be recouped if the prices of the assets return to their original ratio before withdrawal.
4. Providing liquidity also earns fees from trades, which can help offset or even outweigh the impermanent loss.