## The Short Answer Impermanent loss is the difference between holding your crypto in a wallet and depositing it into a liquidity pool, measured when the tokens' prices move apart. Automated market makers rebalance your deposit as prices change, so you end up with more of the falling token and less of the rising one. If prices return to their original ratio, the loss disappears, which is why it is called impermanent. But if you withdraw while prices are still diverged, the loss becomes permanent. Trading fees earned can offset it, but volatile pairs often lose more than fees pay.

## A Simple Numbers Example Imagine depositing $1,000 of ETH and $1,000 of USDC into a pool. If ETH doubles, the pool's formula sells some of your ETH for USDC to keep the 50/50 balance, so you withdraw maybe $2,800 total instead of the $3,000 you would have by just holding. That $200 gap is impermanent loss. The bigger the price move, the bigger the gap: a 2x move costs about 5.7%, while a 5x move costs around 25%. Stablecoin pairs barely move, so their impermanent loss rounds to zero.

## When Fees Cover the Loss and When They Don't High-volume pools on major pairs generate enough fee income to beat impermanent loss over time, which is why ETH/USDC pools stay popular. Low-volume pools with wild tokens rarely earn enough fees to compensate, turning liquidity provision into a slow bleed. Concentrated-liquidity pools amplify both fee earnings and impermanent loss, rewarding precise range-setting and punishing lazy ranges. Before depositing, compare the pool's historical fee APR against the pair's volatility. If fees cannot plausibly cover a 5 to 10% adverse move, you are donating liquidity.

## Strategies to Reduce Impermanent Loss The simplest defense is providing liquidity for correlated pairs, like ETH and staked ETH, which move together and barely diverge. Single-sided staking avoids the problem entirely by keeping you in one asset. Some protocols offer impermanent-loss protection that vests over time, though the coverage terms vary. Finally, treat liquidity positions as active trades: set a price level where you will exit, rather than leaving deposits untouched for a year. Passive pools in volatile pairs are where most DeFi yield farmers learn this lesson the expensive way.

## Frequently Asked Questions **Is impermanent loss guaranteed?** No, if both tokens end at the same relative price you started with, there is zero loss. **Can you lose your entire deposit?** In normal pools, no; but if one token collapses to near zero, your share becomes nearly all of the worthless token. **Do stablecoin pools have impermanent loss?** Almost none, since the peg keeps prices aligned, though depegs have caused real losses. **Do single-sided pools have impermanent loss?** No, holding one asset removes the rebalancing effect entirely, though you still face normal price risk.