What is impermanent loss?
Impermanent loss (IL) is the difference in value between holding tokens in a liquidity pool versus holding them in your wallet. It occurs because AMMs (Automated Market Makers) automatically rebalance pool ratios as prices change.
A simple example
You deposit $500 ETH + $500 USDT into a pool (1 ETH = $500). If ETH doubles to $1,000, the AMM rebalances: you now hold less ETH and more USDT. When you withdraw, you have ~$1,414 — but if you'd just held, you'd have $1,500. The $86 difference is impermanent loss.
Why it's called "impermanent"
If prices return to their original ratio, the loss disappears. It only becomes "permanent" when you withdraw while prices are different from when you deposited.
How to minimise impermanent loss
- Use stablecoin pairs — USDT/USDC pools have near-zero IL because both tokens maintain the same value
- Use correlated pairs — WBTC/ETH moves together, reducing IL vs a USDT/ETH pool
- Use concentrated liquidity carefully — tighter ranges earn more fees but amplify IL if prices move outside the range
- Earn enough fees to offset IL — high-volume pools can generate enough fees to more than compensate
IL in stablecoin pools
For USDT/USDC pools, impermanent loss is negligible — typically less than 0.01% — because both tokens are pegged to $1. This makes stablecoin liquidity provision one of the lowest-risk yield strategies in DeFi.