Impermanent Loss Explained Without the Jargon

Impermanent loss is the #1 misunderstood risk in DeFi. Here is a plain-English explanation with real numbers so you know exactly what you are getting into.

You provide liquidity to a pool. The price of one of your tokens doubles. You withdraw — and somehow have less money than if you had just held. This is impermanent loss, and it is one of the most important concepts in DeFi.

How Automated Market Makers Work

When you add liquidity to a DEX like Uniswap, you deposit two tokens in equal value. The pool uses a formula (x times y equals k) to price them. As the price of one token changes, the pool automatically rebalances — and you end up with less of the token that rose and more of the one that fell.

A Real Example

Deposit 1 ETH + $2,000 USDC when ETH = $2,000. ETH doubles to $4,000. A simple hold would give you $6,000. But the pool rebalances to 0.707 ETH + $2,828 USDC = $5,656. The $344 difference is impermanent loss — about 5.7%.

• 1.25x price change → ~0.6% impermanent loss
• 2x price change → ~5.7% impermanent loss
• 4x price change → ~20% impermanent loss
• 10x price change → ~42.5% impermanent loss

When It Becomes Permanent

Impermanent loss becomes permanent when you withdraw your liquidity. The key question: do the trading fees you earn while in the pool outweigh the impermanent loss? For stable pairs (USDC/USDT), impermanent loss is near zero and fees are pure profit.