What is impermanent loss?

The simple meaning

When you provide liquidity, you deposit two assets into a shared pool. In return, you receive LP tokens, which represent your share of that pool.

Impermanent loss compares the current value of your pool share with the value you would have had by keeping those same starting assets in your wallet. It measures the difference between providing liquidity and holding. It does not, by itself, tell you whether your position has made or lost money overall.

Why your mix of tokens changes

An XRPL AMM pool holds two assets. In a standard equal-weight pool, its price comes from the amount of each asset in the pool. When people trade, those amounts change. If the outside market price of one asset moves, traders and arbitrageurs may trade against the pool until its price is closer to prices elsewhere.

The pool does not rebalance itself or predict prices. Trades change its balances. When an asset becomes more valuable compared with its pair, traders generally take that asset out of the pool and put the other asset in. The pool is then left with fewer of the asset that rose and more of the other asset. If the relative price falls, the flow can reverse.

XRP / DROP: a $1,000 example

Imagine one provider owns an entire example pool worth $1,000. They deposit $500 of XRP and $500 of $DROP. To keep the maths simple, XRP stays at $1, and $DROP starts at $0.01. The pool therefore starts with 500 XRP and 50,000 $DROP.

These examples use a fee-free, equal-weight constant-product pool. They isolate the effect of a price change: actual pools collect fees, and a provider usually owns only part of a pool. Values are rounded.

When $DROP doubles, the pool has less $DROP and more XRP than the wallet comparison. The pool is still worth about 41% more than the original $1,000. Its impermanent loss is the $86 difference from holding, not the gain in dollars.

When $DROP falls by half, both choices lose value. The pool is worth about $707, down from $1,000. That drop includes the market decline in $DROP. Impermanent loss is only the extra $43 difference between the pool and holding the original assets, which would be worth $750.

The percentages compare the pool with holding at the same later prices. They are not a prediction or a fee estimate. If XRP also changes price, that affects the dollar values too.

What about DROP / FUZZY pools?

The same idea applies to a meme coin pair. Suppose a $1,000 DROP / FUZZY pool starts with $500 of each token: 50,000 $DROP at $0.01 and 500,000 FUZZY at $0.001. These are made-up prices for an illustration. The examples below assume no fees and use the same equal-weight pool maths.

• $DROP doubles and FUZZY stays the same: the pool ends up with about 35,355 $DROP and 707,107 FUZZY, worth about $1,414. Holding the original amounts would be worth $1,500, so the pool is about $86, or 5.7%, below holding.
• FUZZY doubles and $DROP stays the same: the pool ends up with about 70,711 $DROP and 353,553 FUZZY, also worth about $1,414. Holding would be worth $1,500, again about $86, or 5.7%, more than the pool.
• Both tokens double by the same percentage: their price relative to each other stays the same. In this simplified example, the pool keeps the original token amounts and is worth $2,000, the same as holding. There is no impermanent loss from that shared price rise.

What matters is how the two token prices move compared with each other. If both rise in dollars but one rises more, their relative price changes and the pool mix can shift. A rise in both prices alone does not tell you whether there will be impermanent loss.

Fees can help, but do not guarantee a profit

People who trade through an AMM pay the pool's trading fee. Fees remain with the pool and benefit LPs according to their share. For example, if you own 1% of a pool, you generally receive the benefit of about 1% of the fees retained by that pool while you hold your share. Your exact result depends on pool rules and changes in your share over time.

Fees can offset some or all of the difference from holding. A position can also rise substantially in dollar value and still be worth less than simply holding the original tokens. Each comparison answers a different question: “Did my position grow?” and “Would holding have done better?”

Providers can have different aims. Some want to earn fees, support trading liquidity, or keep exposure to both projects. Others mainly want to accumulate XRP or $DROP, or to prioritise their total value in dollars. A pool position changes the amounts of each asset you own, so it may not fit every goal.

Depositing one asset or both

You can add both assets to an XRPL AMM pool, or in some cases deposit just one. A two-asset deposit is added in proportion to the pool's current balance. A one-asset deposit can involve the AMM converting part of the deposit into the other asset so the contribution fits the pool. XRPL applies a fee to this single-asset deposit process, which affects how many LP tokens you receive.

The pool's ratio when you enter determines your starting mix. Prices and balances can change after that, and a one-asset deposit does not remove that exposure. These mechanics explain how deposits work; they do not make any entry time or deposit type a guaranteed opportunity.

When does impermanent loss become real?

While you are in the pool, impermanent loss is a comparison with holding. When you withdraw, you receive your share of the pool's then-current assets, including any fees reflected in it. If the relative price of the two assets has changed, the quantities you withdraw may differ from what you deposited.

If the original price ratio returns before you withdraw, the fee-free comparison with holding can shrink or disappear. Real pools also have trading fees and a history of deposits and trades, so an exact outcome depends on what happened while you were providing liquidity. “Impermanent” describes the changing comparison; it does not mean the difference will always go away.

Start with your goal

Before providing liquidity, consider whether you want a changing share of two assets, or would rather keep a fixed amount of one or both in your wallet. Also consider whether potential trading fees are worth the price movement and withdrawal risks for you. The figures on our Liquidity page, including APR estimates, describe past activity and cannot predict your personal result.

Read how to add liquidity for the deposit process. For the protocol details, see the XRPL AMM documentation and AMM deposit documentation.