Impermanent Loss
Temporary loss when providing liquidity to a DEX due to price ratio change.
Impermanent loss (IL) is a phenomenon that occurs when a user deposits a token pair into a DEX liquidity pool, and the price ratio between the tokens changes from the time of deposit.
Example:
•You deposit $1,000 — 50% ETH + 50% USDC in a pool
•If ETH rises 2x, automatic pool rebalancing means you hold LESS ETH and MORE USDC than if you had simply held
•Difference between your LP value and hodl value = impermanent loss
Why "impermanent": If prices return to the original ratio, IL disappears. It only becomes "permanent" if you withdraw liquidity while prices are shifted.
How to hedge IL:
•Stable LP pair (both stablecoins) = no IL
•Correlated pair (ETH/stETH) = minimal IL
•Volatile pairs (ETH/MEME) = high IL risk
Trading fees and yield farming rewards need to outpace IL for LP to be profitable.