Impermanent Loss
The gap between leaving tokens in a liquidity pool and simply holding them, caused when the pooled prices drift apart.
Impermanent loss hits liquidity providers when the two tokens in their pool change price relative to each other. The pool's formula automatically sells the rising asset and buys the falling one, so you end up holding more of the loser. Against simply keeping both coins, you are behind.
It is called impermanent because the gap closes if prices return to where you started, but they often do not. Trading fees can offset the loss, and stablecoin pairs barely move, so they are safer. Volatile pairs are where providers most often discover the cost after the fact.
Related terms
A pot of tokens locked in a smart contract that traders swap against, with prices set by a formula.
Liquidity ProviderSomeone who deposits token pairs into a pool, supplying the funds traders swap against in return for a share of fees.
Automated Market Maker (AMM)A pricing algorithm that lets a token pool quote and settle trades automatically, replacing the traditional order book of buyers and sellers.
Yield FarmingChasing the highest returns by moving crypto between DeFi protocols to earn trading fees and bonus token rewards.