What is impermanent loss?

When the relative price of two pooled assets diverges, the pool rebalances by selling the appreciating one. The provider ends up with less of the winner and more of the loser than if they had held.

Why it matters

The name is misleading and has cost people money. It is only “impermanent” if prices return to their original ratio; when you withdraw, it is realised and entirely permanent. Fee income can outweigh it, which is the reason to provide liquidity at all — but that is an outcome to be measured, not assumed. The loss grows with the size of the divergence, so pairs of unrelated assets carry far more of it than two closely correlated ones.