Impermanent loss is the difference in value between holding two tokens in your wallet versus depositing them in a liquidity pool. Here is how it works, explained simply.
The so-what is simple: when you supply assets to a DeFi pool, your token balances shift automatically to keep the pool balanced. If one token shoots up in price, the pool sells it off. This means you end up with less of the booming asset than if you had just kept it in your wallet.
Imagine you set up a stand with a friend where you put in 10 bananas and $10 cash (valuing bananas at $1 each). Anyone can swap bananas for cash using your stand.
If the price of bananas everywhere else spikes to $2, people will run to your stand, buy up your bananas for $1 cash, and sell them elsewhere. They will do this until your stand has no cheap bananas left. You are left with more cash but fewer bananas.
If you count up your cash and bananas, you are still up in total dollars, but you would have made more money if you had simply sat on your 10 bananas at home. That missed profit is impermanent loss.
Want to see how price moves affect your deposit? Run the numbers yourself using our free Impermanent Loss Calculator.
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