When you supply a pair to a <a href="/glossary/liquidity-pool/">liquidity pool</a>, you are giving an automated market maker permission to trade against your deposit. As the outside market price of one token moves, traders buy the cheaper side out of the pool until the pool’s own price catches up. The effect is that the pool is always quietly selling whichever asset is rising and accumulating whichever is falling, on your behalf.
The name badly undersells the risk. <em>Impermanent</em> only means the gap closes if the two prices return to the ratio they had when you deposited. That is a very big if. The moment you withdraw while they are still apart, the shortfall is realised and it becomes <strong>permanent</strong> — those tokens are simply gone. Some people prefer the blunter label divergence loss, and it is the better mental model.
Trading fees and incentive rewards are meant to compensate for this, and sometimes they do. But the compensation arrives as a slow stream while divergence can arrive as a shock, and a headline yield on a <a href="/glossary/yield-farming/">farming</a> position tells you nothing about how far the pair will drift. Pools of two closely tracking assets diverge less; pairing a volatile token with a stable one exposes you to the full move. Smart-contract failure sits on top of all of it.
DeFi Basics and Risks
Key takeaways
- The loss stays impermanent only while you stay in the pool and the prices eventually converge again; withdrawing crystallises it.
- Providing liquidity means you are systematically net-selling whichever asset is going up.
- Fees and rewards may offset divergence but never guarantee it, and they do nothing about smart-contract risk.
Impermanent Loss — frequently asked questions
Can impermanent loss be avoided completely?
Not while the pooled prices can move relative to each other. Pools holding assets that track one another closely see far less divergence, and some designs concentrate or hedge the exposure, but every one of those carries its own trade-offs and costs. The only exposure with no divergence at all is holding the tokens yourself and not pooling them.
Does impermanent loss mean I lose money overall?
Not necessarily. It measures your position against the alternative of simply holding both tokens, not against your original deposit value. You can finish ahead in cash terms and still have suffered impermanent loss, or finish behind on both counts. The honest comparison is the value of what you withdraw against the value those same tokens would have had untouched.
Related terms
Liquidity PoolAutomated Market Maker (AMM)Yield FarmingStablecoinVolatility All terms →New to crypto, or filling in the gaps? Work through the essentials in Learn, browse every term A–Z, or see live prices for the coins these concepts power.