What Is Impermanent Loss?

Impermanent loss (IL) is the difference between the value of tokens you'd have if you just held them versus what you actually have after withdrawing from a liquidity pool. It happens because automated market makers (AMMs) like Uniswap automatically rebalance your token ratio as prices move.

How It Works in Practice

Say you deposit $10,000 into a Uniswap ETH/USDC pool with 5 ETH and 10,000 USDC. ETH pumps to $3,000. The pool's math forces you to hold more USDC and less ETH to maintain the constant product formula. When you withdraw, you get maybe 3.5 ETH and 15,000 USDC—worth $25,500 total. But if you'd just held your original 5 ETH and 10,000 USDC, you'd have 5 × $3,000 + 10,000 = $25,000. You made $500, but you "lost" $500 in IL because you were forced to sell ETH on the way up.

Why This Matters for Airdrop Farming

When you farm airdrops by providing liquidity on protocols like Arbitrum or Hyperliquid, IL directly eats into your airdrop rewards. You might earn $2,000 in governance tokens from farming, but if IL costs you $1,500, your net gain is only $500. This is why airdrop farmers closely track which pools have the lowest volatility—stablecoin pairs (USDC/USDT) have near-zero IL, while exotic token pairs can wipe out all your farming gains.

Offsetting IL with Airdrop Rewards

The airdrop farming math works like this: IL is a real cost, but trading fees and airdrop tokens are your return. For Uniswap V3 liquidity providers farming UNI, this equation worked in early days. For newer protocols like Jito (SOL-based), the airdrop rewards were massive enough to cover IL for most farmers. Always calculate your IL risk before committing to a farming position—if you expect high volatility and low airdrop payouts, you'll lose money even with tokens.

Key Consideration

IL is only "impermanent" if you don't withdraw. Once you exit the pool, it becomes permanent loss. This is why many airdrop farmers hold positions longer than they otherwise would—locking in IL losses before farming rewards vest is a classic mistake.