CauseThe pool rebalances toward the falling asset as prices diverge
Permanent whenYou withdraw at any ratio other than your entry ratio
Smallest forPairs that move together, such as two dollar stablecoins
FBT Swap
What you should know
When you provide liquidity to a pool, the pool sells the asset that is rising and buys the one that is falling, automatically and continuously. The result is that you end up with less value than if you had simply held both tokens.
The name suggests it reverses. It does, if prices return to where you started. If you withdraw at any other point, the loss is entirely permanent.
Why it happens mechanically
A constant-product pool keeps the product of its reserves fixed. When an external price moves, arbitrageurs trade against the pool until its price matches, and the pool's composition shifts toward the asset that fell.
You own a share of the pool, so you own that shifted composition. Nobody took anything from you; the pool did exactly what it is designed to do.
The size of it
Divergence loss grows with the ratio of price change. A modest move produces a small loss; a large divergence produces a substantial one. It is symmetric — the direction does not matter, only the magnitude of the change in ratio.
This is why two assets that move together, such as two dollar stablecoins or two forms of the same asset, produce very little of it.
When fees win
Fees accrue continuously from volume. A pair with high volume relative to its volatility can earn more in fees than it loses to divergence. A pair with low volume and high volatility will not.
Any yield figure that presents fee income without the divergence comparison is incomplete, which is most of them.
Concentrated liquidity makes both bigger
Providing within a narrow price range multiplies your fee income while the price stays inside it, and multiplies divergence loss when it moves. Outside the range you hold a single asset and earn nothing.
It is a more active strategy than it appears, and treating it as passive income is how people discover the mechanism the hard way.
At a glance
At a glance
01
Cause
The pool rebalances toward the falling asset as prices diverge
02
Permanent when
You withdraw at any ratio other than your entry ratio
03
Smallest for
Pairs that move together, such as two dollar stablecoins
04
Concentrated liquidity
Amplifies both fee income and divergence loss
FAQ
Frequently asked questions
Clear answers before you decide.
Does impermanent loss mean I lose money overall?+
Not necessarily. It means you have less than if you had held. Fee income can exceed it, and the only honest comparison is total position value against simply holding both tokens.
Can I avoid it entirely?+
Only by not providing liquidity to a volatile pair. Correlated pairs minimise it, and single-sided products usually transfer the exposure rather than removing it.
How do I measure it?+
Compare your position's current total value, including claimed fees, against the value of the original token amounts had you never deposited. The difference is the net result.
Risk notice
Crypto assets are volatile and on-chain transactions cannot be reversed. You can lose money, including all of it. Nothing here is financial advice.
