Impermanent Loss: What It Is, Why It Happens, and How to Avoid It

When you put crypto into a liquidity pool, a smart contract that holds paired assets to enable trading on decentralized exchanges. Also known as providing liquidity, it lets you earn fees—but it also exposes you to impermanent loss, the temporary drop in value you experience when the price of your deposited assets changes relative to each other. This isn’t a hack or a bug. It’s math. And if you don’t understand it, you could lose money even when your assets go up in price.

Impermanent loss happens because of how AMMs, Automated Market Makers like Uniswap or SushiSwap that use constant product formulas to set prices work. They don’t use order books. Instead, they keep a 50/50 balance between two tokens. If one token’s price doubles, the pool automatically sells some of that token to rebalance, leaving you with fewer of the rising asset than you’d have had if you just held it. The loss is "impermanent" only if you pull out when prices return to their original ratio. If they don’t? It becomes permanent.

It’s not just about price swings. High volatility, like what you see with meme coins or new DeFi tokens, makes this worse. Look at stablecoin pairs, like USDC/USDT or DAI/USDC, which rarely see big price moves and thus rarely trigger impermanent loss. They’re safer. But even then, if one stablecoin depegs—like what happened with UST in 2022—you’re exposed. And that’s not theoretical. Real people lost millions.

Some traders avoid liquidity pools entirely. Others use them aggressively. The difference? Awareness. If you know how to calculate it, you can predict when it’s worth the risk. Tools like DeFi Saver or Zapper show you estimated impermanent loss before you deposit. You can also choose pools with lower volatility or use single-asset staking instead. And if you’re providing liquidity for a token that’s about to pump? You might be better off just buying it outright.

There’s no magic fix. But knowing the rules changes the game. The posts below break down real cases—from traders who lost 70% in a single week to those who turned impermanent loss into profit by timing exits. You’ll see how flash loan attacks exploit liquidity pools, why some DeFi projects vanish after a price crash, and how to spot a liquidity trap before you’re locked in. No theory. No fluff. Just what actually happened—and what you can do differently.