DeFi
Impermanent Loss
Opportunity cost LPs face when pool token prices diverge.
When the relative price of two pooled tokens changes, the AMM rebalances the pool — leaving LPs with more of the depreciating asset and less of the appreciating one. Compared to simply holding both tokens, the LP underperforms. The loss is 'impermanent' because it can reverse if prices return to entry, but in practice is often realized.
Trading fees are the LP's compensation for taking on this risk. A pool earns its keep when fees outweigh impermanent loss over time.