What is Impermanent Loss?
Last modified:
Impermanent loss (IL) is the difference in value between holding tokens in a liquidity pool and simply holding them in your wallet. It occurs whenever the price ratio of the pooled tokens changes from the ratio at which you deposited.
Why it happens
AMM pools maintain their reserves according to a deterministic formula — typically the constant product rule x · y = k. When the market price of one token rises relative to the other, arbitrageurs trade against the pool to bring its internal price in line with the external market. These trades shift the pool's reserves: it ends up holding more of the token that fell in relative value and less of the token that rose.
As a liquidity provider, your share of the pool reflects this rebalanced composition. Compared to simply holding your original token amounts, you now hold a less favorable mix — that shortfall is impermanent loss.
"Impermanent" — but sometimes permanent
The loss is called impermanent because it can reverse if the price ratio returns to its original level. If you withdraw while the ratio has diverged, the loss is realized and becomes permanent. In practice, prices rarely return to exactly the same ratio, so some degree of IL is the norm.
Concentrated liquidity amplifies the effect
In concentrated-liquidity pools (CenturionDEX v3), providers allocate capital to a specific price range rather than across the entire curve. This magnifies both fee earnings and impermanent loss within that range. A narrow range earns more fees per unit of capital but suffers larger IL for a given price move.
Offsetting impermanent loss
Swap fees earned by the position can partially or fully offset IL. Whether providing liquidity is net-positive depends on:
- The magnitude of price divergence.
- The fee tier of the pool.
- The trading volume routed through the position.
- The width of the price range (v3).
There is no guarantee that fees will exceed IL. Evaluate the trade-off before depositing.