Beginner

Introduction to Impermanent Loss

🕐 7 min read · Updated 2026-10-08 · Not financial advice

If you provide liquidity to an AMM pool (e.g. ETH/USDC on Uniswap), impermanent loss (IL) is the gap between what your deposit is worth in the pool versus just holding the two tokens.

The mechanic: the AMM keeps a constant product. When ETH doubles, the pool automatically sells some of your ETH for USDC to keep the ratio — you end up with less ETH than if you'd held. At a 2x price move your IL is about 5.7%; at 4x it's about 20%.

When it bites: volatile pairs, meme coins, anything that trends hard in one direction. IL becomes permanent the moment you withdraw.

When it doesn't matter: if swap fees + incentives exceed the IL you would have suffered, the position is still net positive. Stablecoin pairs (USDC/USDT) have near-zero IL and mostly earn fees.

Quick check before depositing: estimated fees APR minus expected IL over your horizon > 0? If the coin can 5x, providing liquidity means selling the pump automatically.

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