What is impermanent loss?

Impermanent loss is a risk you face when you provide liquidity to an automated market maker (AMM) like Uniswap or PancakeSwap. It's the difference between what your deposited tokens would be worth if you just held them, versus what they're actually worth inside the liquidity pool.

How it happens: A pool holds two tokens at a set ratio, and prices change as people trade against it. When one token's price moves relative to the other, the pool automatically rebalances (arbitrageurs trade to keep the ratio in line with the real market). That rebalancing means you end up holding more of the cheaper token and less of the more expensive one than you started with.

The math: If the price of one token doubles relative to the other, your deposited position is worth about 5.7% less than simply holding both tokens. At a 4x move it's about 20%, at a 10x move about 42% — the bigger the price swing, the bigger the loss.

Why it's "impermanent": The loss only becomes real if you withdraw while the price is still moved. If the price returns to where it was when you deposited, the loss disappears. But if you pull out while prices are divergent, the loss is locked in and becomes permanent.

Key caveats:

• It applies whenever the two assets move relative to each other. Pairs of volatile assets (e.g. a meme coin vs. ETH) have the highest impermanent loss risk.
• It's not the whole story — you also earn trading fees from every swap in the pool. You're only truly better off if those fees exceed the impermanent loss.
• Pairs of correlated assets (e.g. two stablecoins, or two similar blue-chips) barely move relative to each other, so impermanent loss there is minimal — that's why stablecoin pairs are the classic "safe-ish" LP play.

So the honest framing: providing liquidity is effectively a bet that trading fees will out-earn the value drag from price divergence. If you want a real sense of what a specific pool would have done, that's exactly the kind of thing I can look at — happy to check a particular pair's liquidity and volume if you have one in mind.