Impermanent Loss
The potential loss a liquidity provider faces when the price ratio of pooled tokens changes compared to simply holding them.
When you provide liquidity to a pool (say USDC/ETH), the pool automatically rebalances as prices change. If ETH doubles in price, the pool sells some of your ETH for more USDC to stay balanced. You end up with less ETH than if you'd just held it.
It's called "impermanent" because if prices return to where they were when you deposited, the loss disappears. But if you withdraw while prices are different, the loss becomes permanent.
For USDC-only pools or stablecoin pairs (USDC/USDT, USDC/DAI), impermanent loss is negligible because both tokens stay near $1. This is why stablecoin liquidity provision is considered lower risk.
Related Terms
Liquidity Pool
A smart contract holding paired tokens (like USDC/ETH) that enables trading on a decentralized exchange.
DeFi (Decentralized Finance)
Financial services built on blockchain smart contracts that operate without traditional intermediaries like banks.
Yield
The return earned on deposited or lent cryptocurrency, expressed as an interest rate.
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This definition is provided for educational purposes. USDC.org is an independent resource and is not affiliated with Circle Internet Financial.