Impermanent Loss

What Is Impermanent Loss?

Impermanent loss (IL) is the potential loss that liquidity providers experience when token prices change relative to each other after adding liquidity to an AMM pool.

It is defined as the difference between:

• The value of your tokens if you had simply held them, versus

• The value you have when you withdraw from the pool after the price moves.

If the price ratio of the two tokens moves away from when you deposited, you may end up with a lower total value, even after including fees. If prices later return to the original ratio, the loss becomes “impermanent” (it disappears, ignoring fees).

Why Does IL Happen?

AMMs use formulas like the constant-product invariant:

AMM formula

x * y = k

• When one token’s price goes up relative to the other, the AMM sells some of the rising token to buy the other, rebalancing the pool.

• You end up holding less of the valuable token and more of the weaker token.

When you withdraw, the portfolio may be worth less than if you had simply held both tokens separately.

AMMs rebalance automatically based on their invariant (e.g., x * y = k). That automatic rebalancing is the root cause of impermanent loss when relative prices change.

Why “Impermanent”?

The loss is “impermanent” because:

• It is only realized when you withdraw your liquidity.

• If prices revert to the original ratio, IL disappears.

In practice, in volatile markets, prices may never revert, so IL can become effectively permanent when you exit.

IL On Nad DEX

• IL only affects AMM LPs in spot pools.

• IL does not affect order book liquidity providers (limit orders).

As an AMM LP, your net outcome depends on:

• Trading fees + incentives earned versus

• Impermanent loss from price movement

High-volume pools with good fee yields can offset, or even exceed, IL. Always consider token volatility and fee rates when providing liquidity.