TL;DR
Impermanent loss is the reduction in value that liquidity providers experience when the price ratio of tokens in a pool changes compared to simply holding those tokens outside the pool.
When you deposit tokens into a liquidity pool, the AMM (automated market maker) rebalances your position as prices move. If SOL goes up 50% relative to USDC, the pool sells some of your SOL for USDC to maintain the pricing formula. You end up with less SOL and more USDC than you started with. Compared to just holding both tokens, your LP position is worth less. This difference is the impermanent loss.
The loss depends on how much the price ratio diverges. A 2x price change (one token doubles relative to the other) causes about 5.7% impermanent loss. A 5x change causes about 25%. If the price returns to the original ratio, the loss disappears — hence “impermanent.” But in practice, volatile token pairs (like SOL/meme tokens) can see extreme divergence, and many LPs withdraw at a loss. The loss becomes permanent the moment you exit the position at a changed ratio.
The key question for LPs: do the trading fees earned exceed the impermanent loss? High-volume pools with tight fee tiers can generate enough fees to more than compensate. Low-volume pools or pairs with extreme volatility often don’t. Concentrated liquidity positions on Orca or Raydium earn higher fees per dollar but face amplified impermanent loss if the price moves outside your range. Use yield tools to compare projected fee APR against historical impermanent loss.
Provide liquidity in stablecoin pairs (USDC/USDT) where price ratios barely move. Use correlated pairs (SOL/mSOL) that track each other. In concentrated liquidity pools, set wider ranges to reduce the chance price exits your range. Monitor your positions regularly and rebalance if needed. MadeOnSol’s Yield Comparison tool helps you find pools where fee APR historically outweighs impermanent loss risk.