Notitia
The hidden cost of providing liquidity.
When the prices in a pool diverge, the AMM rebalances automatically: you end up with more of the asset that fell and less of the one that rose. Versus simply holding, that is a loss - impermanent loss.
It is only ‘impermanent’ if prices revert. Earned fees may offset it, or not. This is the key trade-off for every liquidity provider.
You deposit 1 ETH and 2,000 USDC in a Uniswap v2 pool. ETH goes from $2,000 to $4,000. What are you worth compared with someone who simply held?
Test your understanding with a quick interactive quiz.
You are up ($1,657) but you earn $343 less than by holding. Swap fees must cover that gap: a pro always compares the fee yield with the impermanent loss expected for the pair’s volatility.