Impermanent Loss
Impermanent loss is what happens when you provide liquidity to a pool and the two tokens' prices diverge: when you withdraw, your portfolio is worth *less*
Impermanent loss is what happens when you provide liquidity to a pool and the two tokens’ prices diverge: when you withdraw, your portfolio is worth *less* than simply holding both tokens, because the pool keeps rebalancing your shares. The loss is “impermanent” only if prices return to their original ratio.
Why it matters
“Provide liquidity and earn fees” sounds free, but fees can be smaller than impermanent loss. It’s the most misunderstood DeFi risk, which is why platforms now advertise “impermanent loss protection.” If you can’t explain how it works, you shouldn’t be a solo LP.