Impermanent loss: why an LP can lose to simply holding

Impermanent loss (IL) is the liquidity provider's most underrated expense line: the difference between your LP position's value and simply holding the same assets.

Why it arises

The AMM pool constantly rebalances your pair: when token X rises, the pool sells X for Y (arbitrageurs level the price). The result: you hold fewer coins of the risen asset than you started with, and more of the fallen one. The pool systematically "sells the winner and buys more of the loser".

Numbers worth remembering

• One asset of the pair moved ×2 against the other - the LP trails the hold by about 5.7%.
• ×4 - a lag of ~20%.
• ×10 - about 42.5%: fees rarely compensate for that.

"Impermanent" is a sly word: the loss disappears only if prices return to the entry proportion. If they do not - the loss is permanent.

When LPing still pays

Pairs that move together (stable/stable, ETH/LST) - IL is minimal, fees come in clean. A sideways market with volume - fees drip, no divergence: the best LP regime. High-fee exotic pools - risk compensation, if the volume is real. Concentrated liquidity amplifies both the fees and the IL - it is leverage in both directions. The rule: LPing is a bet on sideways plus volume; in a trend, simply holding the winner is almost always richer.