Course Content
Impermanent Loss Explained
If you’ve been involved with DeFi at all, you almost certainly heard this term thrown around. Impermanent loss happens when the price of your tokens changes compared to when you deposited them in the pool. The larger the change is, the bigger the loss. Wait, so I can lose money by providing liquidity? And why is the loss impermanent? Well, it comes from an inherent design characteristic of a special kind of market called an automated market maker. Providing liquidity to a liquidity pool can be a profitable venture, but you’ll need to keep the concept of impermanent loss in mind.
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Introduction
What is impermanent loss?
How does impermanent loss happen?
Impermanent loss estimation
The risks of providing liquidity to an AMM
Closing thoughts
Impermanent Loss Explained
About Lesson

So, impermanent loss happens when the price of the assets in the pool changes. But how much is it exactly? We can plot this on a graph. Note that it doesn’t account for fees earned for providing liquidity.

Here’s a summary of what the graph is telling us about losses compared to HODLing:

  • 1.25x price change = 0.6% loss
  • 1.50x price change = 2.0% loss
  • 1.75x price change = 3.8% loss
  • 2x price change = 5.7% loss
  • 3x price change = 13.4% loss
  • 4x price change = 20.0% loss
  • 5x price change = 25.5% loss
There’s something important you also need to understand. Impermanent loss happens no matter which direction the price changes. The only thing impermanent loss cares about is the price ratio relative to the time of deposit. If you’d like to get an advanced explanation for this, check out pintail’s article.
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