Impermanent Loss

When working with impermanent loss, the temporary dip in value that liquidity providers face when token prices diverge inside an automated market maker (AMM). Also known as IL, it can chew away at your returns if you ignore it. In simple terms, the loss is “impermanent” because it disappears when the token prices return to the ratio you deposited, but it becomes permanent once you withdraw. Understanding this concept is the first step to protecting your capital when you add funds to pools like Uniswap or SushiSwap.

Key Factors Behind Impermanent Loss

The biggest driver is price volatility, how far and how fast the market price of the pooled assets moves away from the pool’s initial balance. A sudden jump in one token’s price means the AMM algorithm constantly rebalances, forcing the pool to hold more of the under‑performing asset. This rebalancing is what creates the loss. Another critical piece is liquidity provision, the act of depositing pairs of tokens into a pool so traders can swap without slippage. When you provide liquidity, you’re effectively betting that the price ratio will stay stable enough for the fees you earn to outweigh any IL you might incur. If the pool’s fee structure is generous or the trading volume high, those fees can offset the loss; otherwise, the IL dominates your net profit.

Automated market makers themselves shape the risk profile. Different AMM designs—constant product (x*y=k), stable‑swap curves, or concentrated liquidity—affect how quickly the pool reacts to price swings. For example, a constant product pool reacts sharply, creating larger IL in volatile markets, while a stable‑swap pool dampens the effect for assets that stay close in value. Finally, many users combine liquidity provision with yield farming, the practice of staking LP tokens to earn extra rewards. Yield farming can mask IL by adding incentive tokens, but it also amplifies exposure: the more you farm, the larger the LP balance, and the bigger the potential loss when prices move.

Putting all these pieces together, impermanent loss is a function of three core elements: price volatility, AMM mechanics, and the rewards you collect from liquidity provision or yield farming. If you can anticipate price moves, choose an AMM that matches the asset correlation, and balance farming incentives against the size of your exposure, you can keep the loss truly “impermanent.” Below you’ll find a curated set of articles that walk through real‑world examples, risk‑mitigation tactics, and the latest research on how to turn IL from a surprise into a manageable factor in your DeFi strategy.

By Eva van den Bergh
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1 Oct 2025

Is Liquidity Provision Worth the Risk of Impermanent Loss?

A practical guide that explains impermanent loss, fee offsets, pool choices and strategies to decide if liquidity provision is worth the risk.

By Eva van den Bergh
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26 Sep 2025

Liquidity Mining Rewards Explained: How They Work in DeFi

Learn how liquidity mining rewards work in DeFi, from fee sharing and token emissions to risks like impermanent loss, with step‑by‑step guidance and a platform comparison.

By Eva van den Bergh
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14 Apr 2025