# What is impermanent loss? The cost of being a liquidity provider

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> Updated: 2026-08-05



When you provide liquidity to an automated market maker, you deposit two tokens and the pool rebalances them as people trade. If the price of one token moves a lot relative to the other, the pool ends up holding more of the loser and less of the winner than if you had just held both. That gap versus holding is impermanent loss.

## When impermanent becomes permanent

It is called impermanent because if the price ratio returns to where you entered, the gap closes. It becomes permanent the moment you withdraw while prices are still divergent. Trading fees are the offset: a pool that earns enough in fees can more than cover the loss. The lesson for a beginner is simple: providing liquidity is not free yield, it is a position with its own risk profile.

**Verify it yourself:** Model it yourself: for a constant-product pool, compare holding two tokens versus the pool value after a 2x price move — the difference is roughly 5.7%

Related: https://blazephoenix.xyz/learn/what-is-a-liquidity-pool · https://blazephoenix.xyz/learn/what-is-an-amm · https://blazephoenix.xyz/learn/what-is-staking