Impermanent Loss
A temporary loss in value that liquidity providers can face when pooled token prices move compared with simply holding the tokens.
Impermanent loss is the difference between the value of tokens deposited in a liquidity pool and the value those same tokens would have had if you simply held them in your wallet. It happens in automated market maker DeFi protocols when the price ratio of the pooled assets changes. The loss is called “impermanent” because it can shrink or disappear if prices move back toward the original ratio, but it becomes realized if you withdraw while the difference remains.
It matters because liquidity providers earn trading fees or rewards, but those earnings may not fully offset impermanent loss. For example, if you deposit equal values of ETH and USDC into a pool and ETH rises sharply, the pool automatically adjusts by holding less ETH and more USDC. When you withdraw, your total dollar value may be higher than when you started, but lower than if you had just held the original ETH and USDC outside the pool.
Other terms in DeFi
AMM
An automated market maker is a DeFi protocol that uses liquidity pools and algorithms to price and swap crypto assets without a traditional order book.
Aggregator
A DeFi service that searches multiple protocols to find better prices, routes, or yields for a user’s transaction.
DEX
A decentralized exchange is a crypto marketplace where users trade directly from their wallets using smart contracts instead of a central intermediary.
DeFi
A blockchain-based financial ecosystem that lets people lend, borrow, trade, and earn yield without traditional banks or brokers.