Impermanent Loss
Share post
In Brief
Impermanent loss is the temporary loss a liquidity provider experiences when the prices of the two tokens in a pool diverge, leaving the position worth less than if the tokens had simply been held.
What Is Impermanent Loss?
Impermanent loss is the difference in value between providing two tokens to a liquidity pool and simply holding those same tokens in your wallet. It happens when the prices of the pooled tokens change relative to each other — the more they diverge, the larger the loss.
It's called "impermanent" because the loss is only realized if you withdraw while prices are out of balance. If prices return to their original ratio, the loss disappears. In practice, however, prices often don't return, making the loss permanent once you withdraw.
Why Does Impermanent Loss Happen?
You deposit two tokens (e.g. ETH and USDC) into a liquidity pool at a set ratio.
The automated market maker (AMM) keeps the pool balanced by adjusting token amounts as people trade.
If one token's market price rises, arbitrage traders buy it from the pool until the pool price matches the market.
As a result, the pool ends up holding more of the cheaper token and less of the more valuable one.
When you withdraw, your share is worth less than if you had simply held the original tokens.
A Simple Example
| At Deposit | After ETH Price Doubles | |
|---|---|---|
| If you held the tokens | $200 | ~$300 |
| If you provided liquidity | $200 | ~$283 |
| Impermanent loss | — | ~$17 (difference) |
The larger the price divergence between the two tokens, the bigger the impermanent loss.
How to Reduce Impermanent Loss
Use stable pairs — pools of two stablecoins (e.g. USDC/USDT) have minimal price divergence.
Use correlated assets — tokens that move together experience less divergence.
Factor in fees and rewards — trading fees and incentives can offset or outweigh impermanent loss.
Avoid highly volatile pairs — large price swings maximize the effect.
Impermanent Loss vs Trading Fees
Liquidity providers earn trading fees, which can offset impermanent loss. Whether providing liquidity is profitable depends on whether the fees and reward tokens you earn exceed the impermanent loss you incur — which is why understanding both sides is essential before depositing.
Impermanent Loss and Trust Wallet
Trust Wallet lets you connect to DeFi protocols and manage liquidity positions through its dApp browser and WalletConnect, across 100+ blockchains. As a non-custodial wallet, you keep full control of your assets — so you can monitor your positions and decide when to add or withdraw liquidity with a clear understanding of impermanent loss.