Impermanent Loss
The loss liquidity providers experience when pool token prices diverge, relative to simply holding the tokens.
Impermanent loss (IL) occurs when the price of tokens in a liquidity pool changes relative to when they were deposited. Because AMMs rebalance automatically to maintain the pool formula, LPs end up with more of the declining asset and less of the appreciating one — leaving them worse off than if they had simply held the original tokens.
The loss is 'impermanent' because it reverses if prices return to the original ratio. However, if an LP withdraws while prices are diverged, the loss becomes permanent. The degree of loss depends on how much prices have moved: a 2× price change causes ~5.7% IL; a 5× change causes ~25% IL.
LPs earn trading fees and sometimes token rewards to compensate for IL. Whether these earnings outweigh impermanent loss depends on pool trading volume, fee tier, price volatility, and holding period. Stablecoin-only pools experience near-zero IL.