Impermanent Loss
The hidden cost of providing liquidity: when pooled assets diverge in price, you end up worth less than if you'd simply held.
Impermanent loss (IL) hits liquidity providers in automated market makers. Because pools rebalance automatically, price divergence between the paired assets leaves your position worth less than just holding them: a 2× move in one asset costs about 5.7% versus holding; 4× costs ~20%.
It’s “impermanent” only because the loss shrinks if prices return to the starting ratio — they often don’t. Trading-fee income is meant to compensate; whether it actually does decides if providing liquidity was profitable. Stablecoin-pair pools minimize IL; volatile-pair pools with thin fees are how LPs earn 8% APY while losing 20% to divergence.