If you’ve ever looked into providing liquidity in decentralized finance (DeFi), you’ve probably come across the term “impermanent loss.” At first glance, it can be a confusing idea, but don’t worry—it’s not as scary as it sounds. Let’s break it down simply and look at some ways you can lower your chances of facing it. We’ll even mention Aerodrome Finance as an example of where you might run into this.

Impermanent loss happens when you put your crypto into a liquidity pool (like ETH and USDC, for example) and the prices of the two tokens change compared to the time you added them. If the price of one token goes way up or down while it’s sitting in the pool, you may end up with more of the token that lost value and less of the one that gained. If you had just held onto your tokens in your wallet instead, they might have been worth more. The “loss” isn’t permanent unless you take your tokens out of the pool when the prices are still different—that’s why it’s called “impermanent.”

So, how can you reduce the chance of this happening or make the impact smaller?

First, stick with token pairs that don’t change price too much. For example, stablecoin pairs (like USDC and DAI) are less likely to swing wildly compared to a pair like ETH and a low-market token.

Second, shorter time periods can help. Impermanent loss becomes more likely the longer your tokens sit in a pool without attention. Watch your investments from time to time and consider removing them when prices shift too much.

Another tip is using pools that offer rewards. Sometimes the extra rewards (like trading fees or incentives) can make up for the loss. But remember, no reward is guaranteed, so check the numbers carefully.

Lastly, some protocols use special features to limit impermanent loss. Keep an eye out for new ideas in DeFi, as smart developers are always working on ways to fix these kinds of problems.

Impermanent loss is something you’ll want to keep in mind if you’re thinking about being a liquidity provider. It’s not the end of the world if it happens, but knowing how it works and how to lower your risks can help you make better choices and protect your crypto.