Impermanent loss

Impermanent loss is the reduction in value a liquidity provider can suffer, compared with simply holding the tokens, when the prices of the tokens in an automated market maker pool move apart.

Here is why it happens. In a typical 50/50 pool of ETH and USDC, the pool's formula keeps the value of both sides balanced. If ETH's price rises, arbitrage traders buy the cheaper ETH from the pool, leaving you with less ETH and more USDC than you started with. You still gain, but less than if you had just held. If the price returns to where it started, the loss disappears, which is why it is called "impermanent"; once you withdraw at a different price, it becomes permanent.

For a price change of 2x in either direction, the loss is about 5.7% relative to holding; for 5x, about 25%. Trading fees may compensate. Pools of two stablecoins or closely correlated assets have much lower impermanent loss.