The difference between holding tokens in a liquidity pool versus holding them in a wallet. When the price ratio of pooled tokens changes, the pool rebalances, and LPs end up with more of the cheaper token and less of the expensive one. The loss is impermanent because it reverses if prices return to the original ratio.
AMM
Impermanent Loss
Related terms in AMM
Automated Market Maker (AMM)
A smart contract that holds token reserves and enables trading without an order book. Prices are determined al...
Constant Product Formula
The pricing invariant x * y = k, where x and y are token reserves and k is a constant. When one token is bough...
Liquidity Pool
A smart contract holding paired token reserves that enables trading. Liquidity providers deposit equal value o...
Liquidity Provider (LP)
A user who deposits tokens into a liquidity pool to facilitate trading, earning a share of trading fees in ret...