Understanding Impermanent Loss in DeFi
Impermanent loss (IL) occurs in automated market maker (AMM) platforms like Uniswap when price fluctuations of pooled assets trigger automatic rebalancing, potentially leaving liquidity providers (LPs) with less value than simply holding the assets separately.
Unlike AMMs, Teller’s lending protocol eliminates IL risk by using isolated lending markets where lenders earn yield from interest payments—without exposure to price shifts or liquidity pool rebalancing.
How Impermanent Loss Works: A Deep Dive
Impermanent loss arises when you deposit two assets into an AMM liquidity pool (e.g., ETH/USDC). The pool automatically adjusts holdings to maintain a set ratio, which can skew your asset balance if prices diverge.
Example Scenario:
- You deposit 1 ETH ($3,000) + 3,000 USDC into an ETH/USDC pool.
If ETH’s price rises to $4,000, the pool rebalances:
- You now hold 0.87 ETH + extra USDC (vs. your original 1 ETH).
- Withdrawing may leave you with less total value than holding the assets separately—this is IL.
Key Mechanics:
- AMM Rebalancing: Pools adjust holdings to reflect price changes, favoring the underperforming asset.
- Price Sensitivity: Larger price swings amplify IL.
- "Impermanent" Myth: Losses become permanent if prices don’t revert before withdrawal.
Risks and Mitigations in Liquidity Provision
Concentrated Liquidity Risks (e.g., Uniswap V3):
- Narrow price ranges earn higher fees but risk IL if prices exit the range.
- Wide ranges reduce IL but yield lower returns.
Volatility & Out-of-Range Liquidity:
- Highly volatile assets (e.g., memecoins) increase IL risk.
- Liquidity outside the active range stops earning fees.
Fee Dependency:
- Trading fees may offset IL over time, but aren’t guaranteed.
👉 Explore Teller’s IL-free lending model
Why Teller Avoids Impermanent Loss
Teller’s peer-to-peer lending model sidesteps AMM risks entirely:
Isolated Lending Pools:
- Lenders supply a single asset (e.g., USDC), avoiding paired-asset rebalancing.
Collateralized Loans:
- Funds are lent against collateral, not traded—no price exposure.
Interest-Based Yield:
- Earnings come from borrower repayments, not volatile trading fees.
Example Platforms with IL Risk:
- Uniswap (ETH/USDC pools)
- Curve (stablecoin pools)
- Balancer (multi-asset pools)
FAQs
Q: Is impermanent loss a real loss?
A: It’s a comparative loss—you forfeit potential gains by providing liquidity versus holding assets.
Q: Can impermanent loss be reversed?
A: Only if asset prices return to their initial ratio before withdrawal.
Q: How does Teller ensure lenders avoid IL?
A: By using lending markets (not AMMs), where assets aren’t rebalanced or exposed to trading volatility.
Q: Are trading fees worth the IL risk?
A: For high-volume pools, fees might offset IL, but this requires constant monitoring.
👉 Start earning with Teller’s secure lending
Final Thoughts
Impermanent loss is an inherent trade-off in AMM liquidity provision, but Teller’s lending model offers a safer alternative—predictable yields without price-dependent rebalancing. By focusing on interest payments and single-asset lending, Teller empowers users to earn passively while avoiding DeFi’s volatility pitfalls.