What is Impermanent Loss in DeFi?

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When you provide liquidity to a pool (e.g., ETH/USDC), your tokens are locked in a smart contract. If the price of ETH rises or falls significantly compared to USDC, you could lose value compared to just holding your tokens.

This difference is called impermanent loss.

It becomes permanent only when you withdraw liquidity.

Pools with stablecoins or correlated assets have lower risk.

High rewards (APY) are meant to compensate for this risk.

Pro tip: Always calculate expected returns vs. impermanent loss before providing liquidity.