Impermanent Loss

The temporary reduction in value that liquidity providers experience when the price ratio of their deposited token pair changes compared to simply holding the tokens. The loss becomes permanent only when the LP withdraws while prices are diverged. The greater the price divergence, the larger the impermanent loss. For example, if you provide ETH/USDC liquidity and ETH doubles in price, you would have been better off simply holding — the AMM automatically rebalances by selling your appreciating asset. Concentrated liquidity positions (Uniswap v3) amplify both fees earned and impermanent loss. Many LPs underestimate this risk: studies show the majority of Uniswap v3 LPs lose money after accounting for impermanent loss versus simply holding.