Impermanent Loss Interview Guide
Impermanent loss interview guide for LP versus hold intuition, price movement, pool rebalancing, fees, examples, and caveats.
Candidates explaining AMM liquidity provider risk in quant interviews.
Impermanent loss compares alternatives
Impermanent loss describes underperformance of providing liquidity versus holding the assets separately under a simplified price move comparison.
Pool rebalancing changes exposure
As relative prices move, AMM trades rebalance pool reserves. The LP ends up with more of the asset that underperformed and less of the one that outperformed.
Concrete example
If one asset doubles relative to the other, arbitrage trades can move the pool price, leaving the LP with a different asset mix than simple holding.
Fees can offset or fail to offset
Trading fees may compensate liquidity providers, but whether they offset impermanent loss depends on volume, fee rate, price path, and pool design.
Common mistakes
Candidates often say impermanent means harmless. A better answer explains the comparison baseline, price path, fees, and why the loss can become realized on withdrawal.
Practice the pattern
Use the LeetQuidity curriculum and calibration to turn this topic into a focused practice plan.