You deposit two tokens into a liquidity pool, the APY looks great, and a few weeks later you withdraw less value than if you had simply done nothing. Nothing broke. Nobody stole your funds. This is impermanent loss — and it catches a lot of beginners off guard.
What Is Impermanent Loss?
A liquidity pool is a shared pot of two tokens (say, ETH and a stablecoin) that a decentralised exchange uses to let people trade. When you add funds, you become a liquidity provider and earn a share of trading fees. That part is real income.
The catch is how the pool stays balanced. If ETH's price rises sharply while your funds are locked in, the pool automatically rebalances — it sells some of your ETH for more of the stablecoin to keep the ratio even. When you withdraw, you end up with less ETH and more stablecoin than you put in. Compared to just holding the original tokens, you're behind. That gap is impermanent loss.
The word "impermanent" is slightly misleading. It becomes permanent the moment you withdraw. If prices return to exactly where they were when you deposited, the loss disappears. In practice, prices rarely do that neatly.
When It Matters Most
Impermanent loss hits hardest when the two tokens in a pool move in different directions, or when one token surges dramatically. A pool pairing a volatile token with a stablecoin is far more exposed than a pool pairing two stablecoins, where prices barely diverge.
This is why triple-digit APY (Annual Percentage Yield — your yearly return expressed as a percentage) on a volatile-pair pool deserves real scepticism. Those reward-token emissions can look generous on paper while impermanent loss quietly erodes your underlying position.
When It Matters Less
Stablecoin-to-stablecoin pools carry very little impermanent loss risk because both tokens are designed to hold the same value. Fee income from high-volume pools can also outpace the loss on moderately volatile pairs — but that requires volume to stay high, which isn't guaranteed.
Before depositing into any liquidity pool, ask yourself: how different could these two token prices be in a month? The wider the potential gap, the more impermanent loss could eat into what the APY promises.
Use the comparison table to look at pool types side by side — then weigh the APY against the token pairing, not just the headline number.