What is Impermanent Loss?

Impermanent loss (IL) is a temporary loss of funds experienced by liquidity providers (LPs) in decentralized finance (DeFi) protocols. It occurs when the price ratio of two assets in a liquidity pool changes. The larger the change, the greater the impermanent loss. This loss is "impermanent" because it's only realized if the LP withdraws their funds from the pool. If the price ratio returns to its original state before withdrawal, the impermanent loss disappears. However, understanding this risk is crucial for anyone participating in DeFi liquidity provision.

Manage your crypto securely with the self-custody Bitcoin.com Wallet app. Explore DeFi opportunities with the Bitcoin.com Wallet app.

Buy as little as $30 worth to get started

Related guides

Start from here →

What is DeFi?

Learn what makes decentralized finance (DeFi) apps work and how they compare to traditional financial products.

Read this article →

What is DeFi?

Learn what makes decentralized finance (DeFi) apps work and how they compare to traditional financial products.

What is a DEX?

A decentralized exchange (DEX) is a type of exchange that specializes in peer-to-peer transactions of cryptocurrencies and digital assets. Unlike centralized exchanges (CEXs), DEXs do not require a trusted third party, or intermediary, to facilitate the exchange of cryptoassets.

Read this article →

What is a DEX?

What are liquidity pools?

A liquidity pool is a collection of cryptoassets that help facilitate more efficient financial transactions such as swapping, lending, and earning yield.

Read this article →

What are liquidity pools?

A liquidity pool is a collection of cryptoassets that help facilitate more efficient financial transactions such as swapping, lending, and earning yield.

What is yield farming?

Learn what yield farming is, how it works, different types, and more.

Read this article →

What is yield farming?

Learn what yield farming is, how it works, different types, and more.

What is liquidity?

Liquidity has several slightly different but interrelated meanings. For the purposes of crypto, liquidity most often refers to financial liquidity and market liquidity.

Read this article →

What is liquidity?

Liquidity has several slightly different but interrelated meanings. For the purposes of crypto, liquidity most often refers to financial liquidity and market liquidity.