Impermanent loss occurs when you provide two tokens to a liquidity pool (LP) on a decentralized exchange (DEX) using an Automated Market Maker (AMM), such as Orca or Raydium on Solana, and the price of these tokens changes relative to each other after your deposit.
Because AMMs automatically adjust pool balances to maintain a constant product, large shifts in asset prices can lead to the value of your pool share being less—sometimes significantly so—than if you had simply held the original tokens outside of the pool. The loss is “impermanent” because it only becomes permanent if the liquidity is withdrawn while those price deviations persist; if prices revert to when you first deposited, the impermanent loss can disappear.
How It Works
When a liquidity provider (LP) deposits assets (for example, SOL and USDC) into a Solana DEX AMM, the protocol enables swaps between those tokens via a formula (often x * y = k). If the price of one token rises or falls dramatically, arbitrage traders rebalance the pool, which alters the token ratios. As a result, LPs may end up with fewer high-value tokens and more of the lower-value ones compared to their initial deposit, thus incurring impermanent loss until/unless prices revert.
Impermanent Loss in Solana’s Ecosystem
Impermanent loss is a fundamental risk for LPs on Solana’s main AMMs like Orca, Raydium, and Lifinity. Although Solana’s low fees and fast transactions can boost yield farming, the price volatility of crypto assets still exposes liquidity providers to impermanent loss, particularly for volatile trading pairs.
🔑 Key points
Impermanent loss affects LPs when the price ratio of pooled tokens changes.
It’s called “impermanent” because losses may reverse if prices return to initial ratios before withdrawal.
More volatile token pairs increase the risk of impermanent loss compared to stable pairs.
Trading fees may sometimes compensate, but not always fully offset impermanent loss.