Impermanent loss arises when the price ratio of the two assets in an AMM pool diverges from the price ratio at the time of your initial deposit.

The term “impermanent” loss refers to the fact that this loss is temporary and can be recovered if the price ratio of the two assets returns to its original value. However, if the prices continue to diverge, the loss becomes permanent.

Examples of impermanent loss occur when:

• The price of asset A increases relative to asset B. This leads to the pool having more asset A than B compared to the initial deposit. As a result, when withdrawing liquidity, the liquidity provider will get more asset A but fewer asset B than they initially deposited; or
• The price of asset A decreases relative to asset B. In this case, the pool will have more asset B than A compared to the initial deposit, resulting in impermanent loss in the opposite direction.