What is Impermanent Loss?
Understand impermanent loss in simple terms and how MaxFi reduces it.
Key Takeaways
- IL happens when token prices change after you deposit
- Trading fees usually more than cover IL, especially on MaxFi
- MaxFi reduces IL through zero-swap rebalancing and rebalance delay
What is IL?
Impermanent loss (IL) is the difference between holding tokens in a pool vs just holding them in your wallet.
When you provide liquidity, the pool automatically adjusts your token ratio as prices change. If ETH goes up, the pool gives you less ETH and more USDC. If ETH goes down, you get more ETH and less USDC.
This rebalancing means you always end up with less of the token that went up. That difference is IL.
Simple Example
You deposit $1,000 into an ETH/USDC pool:
- $500 of ETH (at $2,500 each = 0.2 ETH)
- $500 of USDC
ETH price doubles to $5,000.
If you just held:
- 0.2 ETH = $1,000
- $500 USDC = $500
- Total: $1,500
In the pool:
- The pool rebalanced your tokens
- You now have about $1,414
- IL = $86 (about 5.7%)
You still made money. But you made less than if you had just held.
Why "Impermanent"?
If the price goes back to where it started, the IL disappears. That is why it is called "impermanent."
If the price never comes back, the loss becomes real when you withdraw.
Fees vs IL
Here is the good news. You earn fees the entire time you are in the pool. Those fees offset IL.
If you earn $200 in fees and lose $86 to IL, you are up $114. That is still better than holding.
Most MaxFi pools earn enough fees to more than cover IL. Especially with MaxFi's technology that reduces IL significantly.
How MaxFi Reduces IL
MaxFi uses Snuggle's zero-swap rebalancing engine. It reduces IL in two ways:
Zero-swap rebalancing. MaxFi does not swap tokens during rebalances. This avoids the "sell low, buy high" pattern that makes IL worse. Traditional managers swap during rebalances, and each swap locks in IL. MaxFi skips the swap entirely. This reduces IL by roughly 50% compared to traditional methods.
Rebalance delay. MaxFi 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 after you deposit
- Trading fees usually more than cover IL, especially on MaxFi
- MaxFi reduces IL through zero-swap rebalancing and rebalance delay