You’ve heard you can earn money by providing liquidity in DeFi – but did you know you might actually lose value even when prices go UP? Welcome to impermanent loss!
Let’s say you deposit $500 of ETH and $500 of USDC into a liquidity pool – that’s $1,000 total. Now imagine ETH doubles in price. Great news, right? Well, here’s the twist: if you had simply HELD your ETH, you’d have $1,500. But because of how the pool automatically rebalances, you might only have $1,400 when you withdraw. That $100 difference? That’s impermanent loss.
Think of it like a seesaw. As ETH price rises, the pool automatically sells some of your ETH for more USDC to stay balanced. You end up with less of the winning asset than if you’d just held it in your wallet.
Why “impermanent”? Because if prices return to where they started, the loss disappears! It only becomes permanent when you withdraw at different prices.
So is it worth it? The trading fees you earn might cover the loss – sometimes even exceed it. But if prices move dramatically in one direction, those fees might not be enough.
Pro tip: Stablecoin pairs like USDC/USDT have minimal impermanent loss since both prices stay near $1. Perfect for beginners wanting to provide liquidity with less risk!
Remember: always understand the risks before diving into DeFi. This is education, not financial advice.
