Explanation
The pool automatically sells the riser and buys the faller. Compared with simply holding, you give up return; trading fees have to make up that gap.
Why it occurs
As a liquidity provider you deposit two assets into a pool. If one rises sharply, arbitrageurs gradually buy it out of your pool at the old, lower price. You end up holding more of the falling asset and less of the rising one than if you had simply done nothing. That difference is the loss.
How large is it
If one asset doubles, the loss reaches roughly 5.7 percent versus simply holding; on a fourfold move about 20 percent. Trading fees can offset that, but only in high-volume pools. 'Impermanent' is also misleading: the loss becomes permanent the moment you withdraw your deposit.
Key takeaways
- Largest when prices diverge sharply.
- Stablecoin pairs carry the smallest risk.
- Permanent as soon as you exit.
Frequently asked questions
+Is providing liquidity still worth it?
Sometimes, in high-volume, low-volatility pools. Always compare against the simplest alternative: just holding the two assets.