Impermanent Loss

Impermanent loss (IL) is the opportunity cost of providing liquidity versus just holding the two tokens. It happens whenever the two tokens' prices diverge: the AMM rebalances your position, leaving you with more of the token that fell and less of the token that rose, compared to simply holding.

It's called impermanent because if the price ratio returns to where you entered, the loss disappears. It becomes permanent the moment you withdraw at a diverged price.

What makes it worse (and better)

• More divergence → more IL. Volatile, uncorrelated pairs suffer the most.
• Correlated / pegged pairs → little IL. Stablecoin pairs barely diverge, so IL is minimal, which is one reason stable pools use a dedicated curve.
• Concentrated ranges amplify IL. The tighter your CL range, the more your position rebalances for a given price move; higher capital efficiency comes with higher IL sensitivity. A full-range or classic position behaves like a normal v2 LP.

Beating IL

Providing liquidity is a bet that your earnings outrun your IL. On Alandale an LP earns:

• LUTE emissions (classic pools, via the gauge),
• Merkl CL emissions (concentrated pools, in-range),

and, indirectly, the pool's swap fees fund the veLUTE voters who keep emissions flowing to it. Over time, a well-voted pool's rewards can more than offset moderate IL, but this is not guaranteed, and a large adverse price move can outrun rewards.

Practical guidance

• Start with correlated or stable pairs to minimize IL while you learn.
• For CL, don't over-tighten. A narrow band earns more per dollar while in range, but rebalances hard and drops out of range easily, where it earns nothing and IL is locked in.
• Watch your range. An out-of-range CL position has fully converted to one token; closing it there realizes the divergence.
• Think in total return: fees + emissions − IL − gas. Optimize the whole expression, not just efficiency.

This page describes a risk, not a promise. Model your expected rewards against plausible price moves before committing size.