What is Impermanent Loss?
Understand impermanent loss, why it happens, and how Snuggle reduces it.
Key Takeaways
- IL happens when the price ratio of your two tokens changes after you deposit
- Trading fees usually outweigh IL, making the position profitable overall
- Snuggle reduces IL through zero-swap rebalancing and rebalance delay
What is Impermanent Loss?
When you provide liquidity, you deposit two tokens. If their prices change relative to each other, you end up with a different mix than you started with.
This difference is called impermanent loss (IL). It means your position is worth slightly less than if you had just held the tokens in your wallet.
A Simple Example
You deposit $5,000 of ETH and $5,000 of USDC ($10,000 total).
ETH price doubles. If you had just held, you would have $10,000 ETH + $5,000 USDC = $15,000.
But as a liquidity provider, the pool automatically rebalances. You end up with roughly $12,500 in total value. The $2,500 difference is your impermanent loss.
The bigger the price move, the bigger the IL.
Why "Impermanent"?
The loss is called impermanent because it reverses if the price comes back. If ETH returns to its original price, your IL goes back to zero.
It only becomes a permanent loss if you withdraw while the price is different.
The Good News: Fees Offset IL
While you experience IL, you are also earning trading fees. In most cases, the fees you earn are larger than the IL.
Example: Over 3 months, you earn $800 in trading fees but experience $300 in IL. Your net profit is $500.
The key question is always: do my fees exceed my IL?
How Snuggle Reduces IL
Traditional rebalancing makes IL worse. When the price moves and you need to rebalance, traditional methods swap your tokens. Selling the token that went down and buying the one that went up. This locks in the loss.
Snuggle reduces IL in two ways:
Zero-swap rebalancing. Snuggle repositions your liquidity without swapping tokens. This avoids the sell-low-buy-high problem and reduces IL by roughly 50% compared to traditional methods.
Rebalance delay. Snuggle waits before rebalancing. Prices often bounce back. If the price returns to your range before the delay expires, no rebalance happens. This avoids unnecessary rebalances that would create IL for no reason.
What You Learned
- IL happens when token prices change relative to each other after you deposit
- Trading fees usually outweigh IL, resulting in net profit
- Snuggle reduces IL through zero-swap rebalancing and rebalance delay