Concept Explainer — Yodacom Research · LPIS Series · 2026-06-15

What Is Impermanent Loss?

Why providing liquidity can leave you with less than simply holding — illustrated without math.

Think of the AMM as an automatic rebalancer that always sells what goes up and buys what goes down — the opposite of a holder.
1
The three-step scenario
Follow $4,000 of capital from deposit → price move → comparison
Step 1 — You deposit
ETH 1.0 = $2,000 USDC 2,000 = $2,000 deposited into pool $4,000 total

You put in 1 ETH ($2,000) and $2,000 USDC. Equal value on each side.

ETH 2×
Step 2 — Price doubles
Pool auto-rebalances ETH 0.707 @ $4,000 = $2,828 USDC 2,828 = $2,828 $5,656 total

ETH doubles to $4,000. The AMM auto-sold ETH as price rose. Now 0.707 ETH + $2,828 USDC.

compare
Step 3 — vs. just holding
if you had just held $6,000 1 ETH + $2,000 USDC your LP position value $5,656 0.707 ETH + $2,828 IL = −$344 (−5.7%)

HODL would have given $6,000. LP gives $5,656. The $344 gap is the impermanent loss.

The gap only becomes a realized loss when you withdraw while price is away from your entry point.
2
Why it happens — and the outcome comparison
The AMM's job structurally works against the holder's instinct
The mechanism
The AMM's job is to keep both sides of the pool balanced by value. When price moves, it automatically sells the rising asset and buys the falling one — the opposite of what a holder does. You act as counterparty to every trade, so you always end up with less of the asset that won and more of the one that lagged. Fees are the LP's compensation for accepting this structural drag.
HODL outcome
$6,000
1 ETH at $4,000 + $2,000 USDC. Full exposure to ETH's gain. No fees earned. No IL.
LP outcome (before fees)
$5,656
0.707 ETH + $2,828 USDC. Pool auto-sold ETH as it rose. Missed $344 of upside. This loss narrows or disappears if price returns to entry.
−$344
Impermanent Loss
(−5.7% on entry capital)
Fees can offset IL — but only if volume through the pool is high enough relative to the price move.
3
Why is it called "impermanent"?
And when does it become permanent?
The key nuance
If ETH price falls back to $2,000, the pool rebalances back toward 1 ETH — the gap largely disappears and you'd exit with roughly what you started. The loss is only "locked in" when you exit while price has moved away from your entry. That is why it is called impermanent: it is real when you exit, not before.

For volatile assets that never return to the entry price, "impermanent" is a misleading label. Treat it as a real, material cost — not a technicality.
IL is a structural feature of AMMs, not a bug. The LPIS strategy accounts for it explicitly.
Illustrative concept only. The numbers above (ETH = $2,000 to $4,000, 2x price move) are a simplified example used to show the IL mechanism. They are not simulation outputs and do not represent any specific historical or modeled outcome. Actual IL depends on the price path, pool fee tier, range width (for concentrated liquidity positions), and time in position. Impermanent loss is a real and material cost of providing liquidity in automated market makers; this explainer does not minimize or eliminate it. Not investment advice. See the full LPIS research paper for simulation-based analysis of IL in the specific asset tiers and protocols studied.