In DeFi, you can often hear the phrase: "I added money to the liquidity pool, received commissions, but in the end I earned less than if I just held tokens." Most often, this is due to impermanent loss– in Russian, it is calleda non-permanent lossora non-permanent loss.
It sounds complicated, but the idea is quite clear: when you give your tokens to a liquidity pool, their ratio within the pool changes along with the market. If one token has grown or fallen significantly relative to another, the total value of your share may be lower than when you normally store the same tokens in your wallet.
**1. FIRST: WHAT IS A LIQUIDITY POOL?
**To understand impermanent loss, you need to understand the liquidity pool.
In a typical exchange, buyers and sellers place orders: one wants to buy, the other wants to sell. DeFi often uses a different model – AMM(automated market makermakerмейкер). This is not a person or a company, but an algorithm that allows you to exchange tokens through a shared reserve.
This total reserve is calledthe liquidity pool.
For example, there is an ETH/USDC pool. It contains two assets: ether and стейблкоинthe USDC stablecoin. Users come in and change one thing for another. And those who have contributed assets to the pool are called liquidity providers.поставщиками ликвидности или LP (liquidity providers).
For this, LPS receive a portion of trading commissions. It seems logical: you gave the market liquidity, traders use the pool, and you get income. But here comes a risk that beginners often learn about too late.
As OKX points out in its review of DeFi and AMM, providing liquidity can indeed earn commissions, but at the same time, the provider assumes the risk of non-permanent losses.
**2. WHAT IS IMPERMANENT LOSS IN SIMPLE TERMS
**Impermanent lossis the difference between two scenarios:
- you just kept two tokens in your wallet.
- you have deposited these tokens in the liquidity pool. If the second scenario turned out to be worse than the first, there was a non-permanent loss. Important: This is not necessarily a direct negative in dollars. Sometimes the user still comes out with a profit, but the profit is less than it could be with normal asset storage. A simple example. Let's say you have: • 11ETH at the priceof 2000; • 2000 USDC. Total: 4000. You add them to the ETH/USDC pool. After a while, the price of ETH increased to4000. If you simply held assets in a wallet, you would have: • 11ETH for4000; • 2000 USDC; Total: 6000. But everything works differently in the pool. Traders will buy more expensive ETH from the pool, and the algorithm will change the ratio of assets. As a result, when you withdraw your stake, you may end up with less ETH and more USDC than you originally had. You could earn, but less than if you just held11ETH and2000USDC. This lost profit is impermanent loss.
**3. WHY THE LOSS IS CALLED "NON-PERMANENT"
**The wordimpermanentis translated as "impermanent" or"temporary". The loss is called this because it can decrease or disappear if the token prices return to the previous ratio.
For example, if ETH initially rose and then returned to its initial price relative to USDC, the impermanent loss effect may be reduced.
But there is a trap here: the loss becomes quite real when you exit the pool. As long as you haven't taken away the liquidity, it's more of a calculated difference. As soon as the funds are withdrawn, the result is recorded.
So the term is a bit misleading. "Fickle" doesn't mean "frivolous." If the price of one asset has gone far and has not returned, losses can be significant.
ECOS ' analysis of impermanent loss highlights exactly this point: liquidity providers can receive commissions and rewards, but the risk of short-term returns compared to conventional asset storage remains a key factor.
**4. WHERE DOES IMPERMANENT LOSS COME FROM?
**The reason is due to the mechanics of AMM.
In most pools, the algorithm tends to maintain a certain balance between assets. If one token becomes more expensive, arbitrageurs start buying it from the pool until the price inside the pool is equal to the external market.
Arbitrageursare participants who earn money on the price difference between platforms. If an asset is cheaper somewhere, they buy there and sell more expensively elsewhere.
This is useful for the market: prices are aligned. But for the liquidity provider, this means that the pool automatically sells part of a rising asset and buys a cheaper or more stable asset.
That is why LP often finds itself in the situation :" If I just held the token, I would earn more".
On the portal 24k.ruimpermanent loss is described as a situation where an LP receives a lower final result than a regular holder, due to changes in prices within the pool.
**5. WHY COMMISSIONS DON'T ALWAYS SAVE YOU
**Liquidity providers receive commissions from exchanges. This is the main incentive to participate in pools. Sometimes commissions really cover the impermanent loss, especially if the pool has a large trading volume.
But this is not a guarantee.
Let's imagine two pools:
• a quiet USDC/USDT pair, where both tokens are close to11;
• a volatile ETH/new token pair, where one asset can rise or fall by tens of percent.
In the second case, the commission may be higher, but the risk of impermanent loss is much more serious. If the price of one token goes up or down sharply, the fees may not cover the difference.
**6. WHERE THE RISK IS HIGHER AND WHERE IT IS LOWER
**Impermanent loss is more pronounced where the tokens in the pair move differently.
Higher risk
The risk is usually higher in pairs:
• cryptocurrency vs stablecoin, such as ETH/USDC;
• a new token against a large coin.
• memcoin vs ETH or SOL;
• assets with low liquidity;
• pairs where a single token can plummet or grow.
Lower risk
The risk is usually lower in pairs:
• stablecoin vs stablecoin, such as USDC/USDT.
• similar assets that move close to each other.
• special pools for tokens that are close in price.
But "lower risk" does not mean "no risk". Stablecoins also have problems: the loss of the dollar peg, freezes, regulatory restrictions, and questions about reserves.
Crypto-DeFiIn its explanation of impermanent loss, Crypto-DeFi also advises to pay close attention to the choice of a pair and separately highlights more stable pairs as a way to reduce the impact of IL.
**7. HOW TO EVALUATE IMPERMANENT LOSS FOR A BEGINNER
**You don't need to become a mathematician, but it's good to ask yourself a few questions before entering the pool.
The first one: what happens if one token grows twice?
Second one: what happens if one token drops by50%?
Third one: what commissions does the pool generate and for what period?
Fourth: is there enough trading volume in the pool?
Fifth: Do I understand both assets I'm adding?
Sixth: is there a risk that one of the tokens will be reset or lose trust?
It is especially important to remember that high profitability in the DeFiprotocol interface often does not show the whole picture. APR or APY is an estimated annual return, but it can change quickly and does not take into account future price movements.
**8. MAIN MISTAKE: CONSIDER LP AS A PASSIVE DEPOSIT
**A liquidity pool is not a bank deposit or "just put it down and forget it". The LP position behaves like a complex market instrument. You hold two assets at the same time, automatically buy one and sell the other through the algorithm, receive commissions and accept the risk of price changes.
Therefore, the liquidity provider should look not only at the yield, but also at the total value of the position.
A good question goes like this: "I am ready to own both tokens in any proportions if the market changes dramatically?" If the answer is no, the pool may be psychologically and financially inconvenient.
result
Impermanent lossis the risk that participation in the liquidity pool will bring less than the usual storage of the same tokens. It occurs due to price changes between assets in the pair and automaticrebalancing within the AMM.
Commissions can compensate for this effect, but not always. The more token prices diverge, the higher the risk. You should pay special attention to volatile pairs and new tokens.
The main idea is simple: profitability in DeFi is not free. If the pool promises commissions and rewards, you need to understand the risk behind this return. Impermanent loss is one of the key risks that distinguishes a liquidity provider from a regular token holder.
Top comments (0)