Impermanent Loss

Impermanent loss, also called divergence loss, is the shortfall a liquidity provider experiences when the prices of the tokens in a pool move apart. Because an automated market maker rebalances continuously, the pool effectively sells whichever asset is rising and buys whichever is falling. When the provider withdraws, the position can be worth less than simply holding the two tokens in a wallet. It is called impermanent because it shrinks if prices return to their original ratio, and becomes permanent only once funds are withdrawn. Trading fees and incentive rewards can offset part of it, and pools of assets that track each other closely, such as two stablecoins, usually experience far less of it.