Impermanent loss

The opportunity cost an AMM liquidity provider incurs when pooled token prices diverge.

Impermanent loss is the difference between holding two tokens in an AMM pool versus holding them in a wallet. When the price ratio of the two tokens changes, the pool automatically rebalances, leaving the LP with less of the appreciating asset. The loss is "impermanent" only in that it reverses if prices return to their original ratio — which usually doesn't happen.

LPs earn trading fees that may or may not offset IL. Whether providing liquidity is profitable depends on the pair's volatility, the fee tier, and trading volume. Stablecoin pairs have minimal IL but also low fees; volatile pairs offer higher fees but punishing IL.