Why it happens
When you provide liquidity, an AMM keeps the pool balanced by selling whichever token is rising and buying whichever is falling. That constant rebalancing means you always hold less of the winner and more of the loser than you would have by just holding. The value gap versus holding is the impermanent loss.
A worked example
Deposit 1 ETH and 2,000 USDC into a 50/50 pool when ETH is $2,000. If ETH doubles to $4,000, arbitrageurs rebalance the pool and you end up with roughly 0.707 ETH and 2,828 USDC — about $5,657. Simply holding the original 1 ETH + 2,000 USDC would be worth $6,000. That ~$343, or about 5.7%, is the impermanent loss.
It is called “impermanent” because if the price returns to where you entered, the loss disappears. It only becomes permanent when you withdraw while the ratio is still shifted.
When fees make it worthwhile
Liquidity providers earn a cut of every swap. In a busy pool, accumulated fees can more than offset impermanent loss; in a quiet one, they may not. The deciding factors are volume relative to liquidity and how far the price ratio drifts.
- High volume, low volatility → fees usually beat impermanent loss.
- Low volume, high volatility → impermanent loss often wins.
- Correlated pairs (e.g. stablecoin/stablecoin) → minimal divergence, minimal loss.
Reading the risk before you provide
Before adding liquidity, look at the pool’s recent volume-to-liquidity ratio and the historical volatility of the pair. CoinVerum surfaces both sides of every qualifying pool and its 24h volume, so you can judge whether trading activity is likely to compensate you — read more in reading on-chain liquidity.
Frequently asked questions
Is impermanent loss a real loss?
It is a real opportunity cost versus holding, and it becomes a realised loss if you withdraw while the price ratio has diverged. Swap fees earned while providing can offset or exceed it.
How do I avoid impermanent loss?
Provide liquidity to correlated pairs (like two stablecoins) where the ratio barely moves, or choose high-fee, high-volume pools where fee income outweighs the divergence. There is no way to eliminate it on a volatile pair.
Does impermanent loss affect concentrated liquidity more?
Yes. Concentrated-liquidity positions (Uniswap V3/V4) amplify both fees and impermanent loss because your capital is packed into a narrow price range.