Impermanent Loss
Impermanent loss is the difference between holding tokens in a liquidity pool versus just holding them in your wallet. It occurs when the price ratio of pooled tokens changes.
Understanding the Concept
IL is the hidden cost of being a liquidity provider. If you provide ETH/USDC liquidity and ETH moons, you end up with less ETH (the pool rebalances). Your position is worth less than if you just held ETH. The loss is "impermanent" because if prices return to the starting ratio, it disappears. But often they don't. The bigger the price move, the bigger the IL. You're essentially selling winners and buying losers automatically. Trading fees can offset IL, but you need to do the math. Stablecoin pools minimize IL since prices don't diverge much.
Real-World Example
You deposit $5,000 ETH and $5,000 USDC into a pool. ETH doubles. Without the pool, you'd have $15,000. In the pool, rebalancing leaves you with ~$13,400 worth. That $1,600 difference is impermanent loss.
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