Impermanent Loss
The temporary loss liquidity providers experience when the price ratio of pooled tokens changes.
Explained Simply
Impermanent loss occurs when you provide liquidity to a pool and the prices of the tokens change relative to each other. The bigger the price divergence, the bigger the loss compared to simply holding the tokens. It's called 'impermanent' because the loss only becomes permanent when you withdraw. Trading fees earned may offset the loss, but for volatile pairs, impermanent loss can be significant.
Example
If you deposit ETH and USDC into a pool and ETH doubles in price, you'd have more value just holding — the pool rebalances, giving you more USDC and less ETH.
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This content is for educational purposes only and does not constitute financial, tax, or legal advice. Always consult a qualified professional for advice specific to your situation.