Risks & Security
Impermanent Loss
LP underperformance versus holding as relative token prices change
Definition
Impermanent loss is an LP position’s underperformance against simply holding the same initial tokens, caused by AMM inventory rebalancing as relative prices change. It exists while funds remain deposited; withdrawal does not create it. For a fixed full-range constant-product pool, the fee-free comparison depends on the price ratio; concentrated ranges and repositioning introduce range and path dependence. Fees can offset the shortfall.
Example
Deposit 1 ETH and 2,000 USDC at ETH = $2,000 in a 50/50 constant-product pool. At $4,000, excluding fees, your share is about 0.7071 ETH + 2,828.43 USDC, worth $5,656.85 versus $6,000 held: roughly 5.7% less.
How it works
Arbitrage trades align the pool price with external markets, changing the assets backing your share. Compare the marked-to-market LP value plus fees with the value of the original token amounts, not just with the deposit’s dollar cost.
Risks to Consider
- Arbitrage sells the appreciating token out of your position
- A narrow range can leave you entirely in the depreciating asset
- Fees may not cover inventory losses, especially around sharp moves
Common Questions
Does impermanent loss only exist when I withdraw?
No. The opportunity loss is already measurable while deposited. Price reversion may reduce it in a fixed full-range pool, but fees, range changes and realized rebalancing costs alter the final result.
