When one asset in a pool rises against the other, arbitrageurs buy the appreciating asset out of the pool until the ratio matches the market. The provider is left holding more of the weaker asset and less of the stronger one, and that position is worth less than simply having held both assets outside the pool. The gap is impermanent loss.
It is called impermanent because it reverses if the prices return to their original ratio, but it becomes permanent the moment the position is withdrawn. Trading fees are what offsets it: a pool of two closely correlated assets, like two stablecoins, generates very little divergence and so very little loss, while a volatile pair needs substantial fee income to come out ahead.
How do I avoid impermanent loss?
Provide to pools whose assets move together — stablecoin pairs or an asset against its wrapped version — where the ratio barely changes. Any volatile pair carries the exposure by design.
Last updated October 17, 2026