📊 What is impermanent loss

If you provide liquidity to a pool, you are not simply holding tokens in your wallet. You are depositing two assets in a mechanism that constantly rebalances.

This can generate fees, but can also create a relative loss called impermanent loss.

Impermanent loss is the difference between: holding assets in your wallet vs. providing them as liquidity in a pool.

It happens when the price of assets changes relative to the moment of deposit.

You deposit in a pool: SOL and your token. If the token price rises a lot, the pool rebalances. When you withdraw, you might have fewer tokens than you would have had by simply holding them in your wallet. That difference is the impermanent loss.

AMM pools maintain a mathematical ratio between two assets. When users buy a token, the pool sells that token and receives the other asset. This changes the composition of your position. It is not a bug — it is how the automated market works.

It is called impermanent because if the price returns to the initial ratio, the theoretical loss can reduce. It becomes real when you withdraw liquidity while the price has changed.

Liquidity providers receive a share of the fees generated by swaps. If volume is high, fees can compensate part of the impermanent loss.

In memecoins volatility is often high, meaning impermanent loss can be more significant. Providing liquidity can be useful for the project, but it is still a financial risk.

Before depositing liquidity, understand: how much you can risk, how volatile the token is, how much volume you expect, when you might withdraw, and how you will communicate any changes.