Impermanent loss: compare providing liquidity with holding

The idea in plain English

In some automated-market-maker pools, the quantities of assets you own through the pool change as relative prices move. Compared with simply holding the original assets, the position can underperform because of this rebalancing. This difference is often called impermanent loss, though leaving the position can crystallize the outcome.

The distinction that matters

The amount depends on the pool design, price path and position parameters. Fees and rewards may offset some differences but are not guaranteed to do so. Concentrated-liquidity positions add range and management considerations. Contract failure and token risk are separate from the relative-performance calculation.

A practical example

An illustrative two-asset pool rebalances as one token rises against the other. Your share may end up with less of the rising token than a hold-only portfolio would have. The pool can earn fees while still trailing the hold-only comparison after costs.

Try this without moving money

• Define the exact hold-only benchmark before evaluating a pool.
• Separate fee income, rewards and relative asset performance.
• Read the pool’s range, withdrawal and contract-risk documentation.

A mistake to avoid

Do not interpret impermanent as harmless or automatically reversible. A price relationship may never return to the starting point.

Before you act

An audit, popular interface or large deposited balance is not an insurance policy. Contracts may depend on administrator keys, price feeds, bridges and outside issuers. Understand withdrawals and liquidation before experimenting. Learning does not require depositing funds, granting approvals or using leverage, and this guide does not recommend a protocol.