Impermanent loss occurs when the value of the tokens you’ve deposited into a liquidity pool changes compared to simply holding them in your wallet. It happens because automated market makers (AMMs) adjust token ratios in the pool as prices move, meaning you end up with more of the token that went down in value and less of the one that went up.
The loss is called impermanent because it may disappear if prices return to their original levels. However, if you withdraw your funds while the price difference remains, the loss becomes permanent.
For example, if you deposit equal values of ETH and USDC into a pool and ETH’s price rises sharply, the pool automatically sells some ETH for USDC to maintain balance. When you withdraw, you’ll have fewer ETH than you started with—worth less overall than if you had just held them.
Impermanent loss doesn’t always mean losing money—trading fees and rewards can offset it—but it’s a key risk for liquidity providers in decentralized finance (DeFi).