Impermanent Loss
The temporary loss experienced by liquidity providers when the price ratio of deposited assets changes compared to when they were deposited.
Why It Matters
Impermanent loss occurs when the value of assets in a liquidity pool decreases compared to simply holding the assets. It's a crucial concept for anyone providing liquidity to decentralized exchanges, impacting potential returns.
Example
For example, if you provide liquidity to a pool of ETH and a stablecoin, and ETH's price rises significantly while you are providing liquidity, your returns might be less favorable than if you had just held onto your ETH instead of entering the pool.
Beginner Context
For beginners, grasping impermanent loss is essential when considering liquidity provision in decentralized finance (DeFi). It highlights the trade-offs and risks involved, helping you make better-informed choices.
Mike Starr
Founder, CryptoWizardTools · M.S. Organizational Management
Last reviewed: August 2026
Related Terms
Initial DEX Offering
A token launch that takes place on a decentralized exchange rather than a centralized platform. IDOs give the public earlier access to new projects and allow for immediate open-market trading once launched.
Escrow
A third-party service or smart contract that holds funds until certain conditions are met, then releases them to the appropriate party. In crypto, smart-contract escrow removes the need to trust a human intermediary.
Initial Exchange Offering
A token launch conducted through a centralized exchange rather than directly to the public. The exchange lists and sells the token, typically after some review of the project, giving buyers a curated alternative to open ICOs.
Depeg
When a stablecoin loses its target value — for example, a USD-pegged stablecoin trading at $0.90 instead of $1.00. Depegs can be brief (caused by liquidity stress) or permanent (caused by a broken mechanism or lost reserves).
Gas Price
The amount a user is willing to pay per unit of gas, usually quoted in gwei on Ethereum. Higher gas prices get transactions processed faster when the network is congested; lower prices can leave transactions pending.