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What Is “Impermanent Loss” and How Does It Affect the Risk Profile of Liquidity Provision?

IL is the loss from price ratio changes versus simply holding; it forces LPs to sell the appreciating asset and buy the depreciating asset.
Greeks.Live16.11.25

What Is “Impermanent Loss” and How Does It Affect the Risk Profile of Liquidity Provision?

Impermanent loss (IL) is the temporary loss of funds a liquidity provider (LP) experiences when the price ratio of the deposited tokens changes compared to simply holding them in a wallet. IL occurs because the automated market maker (AMM) forces the LP to sell the appreciating asset and buy the depreciating asset to maintain the 50/50 ratio.

While trading fees can offset IL, it introduces a significant, unique risk that must be factored into the expected return of liquidity provision.

What Is Impermanent Loss in the Context of Liquidity Provision for Tokenized Derivatives?
How Does Impermanent Loss Relate to a DAO’s Strategy of Providing Liquidity with Its Native Token?
What Is the Risk of ‘Impermanent Loss’ in DeFi?
What Is ‘Impermanent Loss’ for a Liquidity Provider in a Smart Contract-Based DEX Pool?

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