Topic · Money, companies and rules
What is impermanent loss?
- Quick fact 1
Uniswap’s documentation describes impermanent loss as the difference between holding tokens and providing them as liquidity.
Source: Uniswap v2 docs: Understanding returns (impermanent loss)
- Quick fact 2
Pool rebalancing happens automatically as traders swap against the pool.
Source: Uniswap v2 docs: How Uniswap works (liquidity pools)
- Quick fact 3
DeFi apps run as smart contracts without a bank-style guarantee.
Source: ethereum.org: What is DeFi?
The short lesson
When you deposit two tokens into a liquidity pool, the pool keeps rebalancing them as traders swap. If one token’s price rises sharply against the other, traders take more of the rising token from the pool. You end up holding more of the token that fell and less of the one that rose.
Compared with just holding the two tokens in your wallet, you can be worse off. That gap is called impermanent loss.
Why “impermanent”?
If prices return to where they were when you deposited, the gap shrinks or disappears. If you withdraw while prices are apart, the loss becomes real.
What beginners should take away
- Pool fees can offset impermanent loss, or not.
- The bigger the price move, the bigger the effect.
- Advertised yields usually do not include it. Ask how the number was calculated.
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Related terms
Go deeper in Lesson 10: How to keep learning
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Common questions
Is impermanent loss the same as losing money?
It is losing value compared with holding. You can also lose money outright if token prices fall.
Does it affect stablecoin pairs?
Less, if both stay at their peg. A depeg can cause big losses.
Can fees cover it?
Sometimes. It depends on trading volume and how far prices move.
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Written and reviewed by Joshua Baskin, founder. Last reviewed . How we check facts · Report an error
Education only. Not investment, tax or legal advice. We do not pick coins.