Impermanent loss: the non-myth explanation

Impermanent loss (IL) is underperformance vs holding when prices diverge.

Key point

How to reduce IL risk

• Prefer lower-volatility pairs.
• Use wider ranges in v3.
• Don’t chase APR screenshots.

A simple example

If one token rises strongly relative to the other, the pool rebalances you toward the weaker token. Compared to holding, you may underperform. Fees can offset this, but you should estimate whether typical volume is likely to compensate for the volatility of the pair.

When IL is usually smaller

• Stable/stable pairs
• Assets with strong correlation
• Wider v3 ranges (less aggressive concentration)

IL vs fees: the trade‑off

Fees are your compensation for providing liquidity. IL is the performance gap versus holding during price divergence. In calm markets with steady volume, fees can offset IL. In sharp trends, IL can dominate. The question is not “does IL exist?” — it’s “is the expected fee flow worth the risk profile?”

Think in scenarios

• Range‑bound market: often friendlier for LPs.
• Strong trend: holding may outperform LPing.
• High volatility + low volume: often worst-case for LP results.

Intuition without formulas

Pools keep a balance between two assets. When the market price moves, arbitrage trades rebalance the pool. As a result, the LP ends up with more of the asset that underperformed and less of the one that outperformed — compared to holding. That performance gap is what people call impermanent loss.

Why the word “impermanent” can mislead

The gap can shrink if prices move back, but LPs shouldn’t assume mean reversion. Think of IL as a risk exposure, not a temporary inconvenience. If you withdraw while prices are far apart, the underperformance versus holding becomes “realized.”