DeFi 1 min read
Impermanent Loss
Also known as: IL, Divergence Loss
The loss LPs suffer when the ratio of pooled tokens changes, versus simply holding those tokens.
Quick intuition
You provide 1 ETH + 3,000 USDC to a 50/50 pool. ETH doubles to 6,000 USDC.
- Holding → 1 ETH (6,000) + 3,000 USDC = 9,000.
- LPing → the pool rebalances, you now have less ETH, more USDC, worth roughly 8,485 + fees earned.
The gap (~5.7%) is impermanent loss. It's called impermanent because if price returns to the original ratio, the loss disappears.
When fees make it worth it
IL is a cost. LP fees are the revenue. Profitable LPing requires:
- High trading volume relative to TVL (fees > IL).
- Correlated assets (stable/stable, ETH/stETH) where IL is tiny.
- Concentrated liquidity (Uniswap V3) done actively, not set-and-forget.
Reality check
For most retail LPs over long horizons, IL has eaten the fees. Study before you farm.