What Is Impermanent Loss and How Does It Relate to Providing Liquidity?

Impermanent loss is a potential risk for liquidity providers (LPs) in AMMs. It is the difference in value between holding two tokens in a liquidity pool versus simply holding them in a wallet.

If the price of one token changes significantly relative to the other, the value of the LP's stake in the pool can be less than if they had just held the assets. The "loss" is unrealized until the LP withdraws their liquidity from the pool.