Definition
Impermanent loss (IL) occurs when the price ratio of tokens in a liquidity pool changes from the initial deposit ratio. The greater the divergence, the larger the loss compared to simply holding the tokens. It is "impermanent" because if prices return to the original ratio, the loss disappears. In practice, trading fees earned often offset IL, but extreme price movements can overwhelm fee income.
functions Formula
IL = 2√(price ratio) / (1 + price ratio) − 1
lightbulb Example
An LP deposits equal value of ETH and USDC when ETH = $3,000. ETH rises to $4,000 (33% increase). IL ≈ 1.7% compared to holding. If ETH doubles to $6,000, IL ≈ 5.7%. Trading fees of 0.3% per swap can offset IL if volume is sufficient.
verified_user Key Points
- Occurs when pool token prices diverge from deposit ratio
- Greater price divergence = larger loss
- Called "impermanent" but often becomes permanent
- Trading fees can offset IL in high-volume pools