Plain English
Impermanent loss is the gap between holding two tokens passively versus depositing them in an AMM pool. When prices move, the pool rebalances against you — selling whichever asset is rising and buying whichever is falling. The “loss” is only realized if you withdraw; if prices return to ratio, it disappears.
How it actually works
Constant-product AMMs (Uniswap V2 style) enforce x*y=k, so the pool always rebalances toward 50/50 value. If ETH doubles while USDC stays flat, the pool sells ETH on the way up — your ending balance is worth less than if you had just held the original 50/50. Concentrated liquidity (Uni V3) magnifies both fees and impermanent loss within the active range.
What it means for you
IL is the silent killer of LP returns. The rule of thumb: only LP pairs that are highly correlated (two stablecoins, two LSTs of the same asset) or where fees overwhelmingly compensate for it. For HNW positioning, single-sided yield (lending, staking) is usually cleaner than volatile AMM LPing.
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Educational content only. Not investment, tax, or legal advice.