What Is Impermanent Loss and How Does Teller Avoid it?

Teller Protocol

• 5 min read
What Is Impermanent Loss and How Does Teller Avoid it?

TL;DR: Impermanent loss (IL) happens in AMMs like Uniswap when one asset’s price shifts, causing the pool to rebalance and potentially leave you with less total value than simply holding the assets.

Since Teller uses lending markets instead of liquidity pools, lenders aren’t exposed to IL—your assets stay in the form they were lent, and yield comes from interest payments, not automated rebalancing or trading fees.

Okay…but what does that actually mean? What are the mechanics of that?

Let’s cut to the chase—simply put, impermanent loss is the difference in value between holding two assets in a liquidity pool versus simply holding them in your wallet. It happens when one asset’s price moves significantly, causing an imbalance when withdrawing.

Impermanent loss happens when you provide liquidity to an automated market maker (AMM) like Uniswap or Curve, where you deposit two assets into a liquidity pool. Since the AMM constantly rebalances the pool to maintain a ratio, if one asset’s price changes significantly, you end up with more of the weaker asset and less of the stronger one when withdrawing.

For Example:

Let’s say you provide 1 ETH ($3,000) and 3,000 USDC to a ETH/USDC liquidity pool.

  • If ETH’s price rises to $4,000, the pool rebalances, and you now hold 0.87 ETH + some extra USDC instead of your original 1 ETH.
  • If you withdraw, your total value might be less than if you had just held 1 ETH and 3,000 USDC separately—this is impermanent loss.

Additional Considerations With Impermanent Loss

  • Range selection matters: In concentrated liquidity models (like Uniswap V3), liquidity providers choose a price range where their assets remain active. Narrow ranges earn more fees but face higher IL risk if prices move out of range, while wider ranges offer stability but lower returns.
  • Out-of-range liquidity: If the price moves outside your selected range, you stop earning fees and could be left holding the weaker asset.
  • Liquidity distribution impacts IL: If most liquidity sits at a certain price level, sudden price swings can push providers out of range.
  • Volatility increases risk: Highly volatile assets make it harder to maintain a safe range, requiring constant position monitoring.
  • How Teller avoids these risks:  Teller doesn’t do AMMs, price ranges, or any of the related risks—lenders can deposit a single asset, earn yield from interest, and aren’t exposed to IL.

So, Do You Actually “Lose” Money With Impermanent Loss?

Yes and no—it depends on when you withdraw. Impermanent loss means that, compared to simply holding your assets, you end up with less total value when withdrawing from a liquidity pool. However, you don’t technically “lose” money in the way you would from a bad trade—it’s just that the AMM rebalancing process left you with a less favorable asset mix than when you started.

If the price ratio returns to where it was when you deposited, the loss disappears. But if it doesn’t—and you withdraw—you’ve locked in the loss permanently. This is why many liquidity providers rely on trading fees to offset impermanent loss over time.

In a sense, impermanent loss is more so about missing out on potential gains than it is about actual “losses”, which is essentially the risk you take by providing liquidity.

If the ETH in our example declines, you still don’t technically lose money from impermanent loss itself—your total holdings are worth less, but the same would be true if you were just holding ETH.

However, here’s where it matters:

  • If ETH drops while in a liquidity pool, you end up with more ETH and less USDC due to the AMM rebalancing.
  • If ETH drops while just holding it, you have the same amount of ETH, but it’s worth less in USD terms.

Why Is It Called “Impermanent” Loss?

The term "impermanent loss" comes from the early days of DeFi to describe losses that could be "temporary" if prices return to their original levels before withdrawing liquidity. The idea was that if an asset’s price fluctuates but eventually stabilizes, the loss disappears.

However, in reality, most liquidity providers never recover their losses unless trading fees outweigh them, making the term somewhat misleading.

Some argue it was a marketing-friendly way to make the risk sound less severe, when in practice, it often results in real, permanent losses for LPs who withdraw at the wrong time.

How does Teller Avoid Impermanent Loss?

Impermanent loss only happens in liquidity pools, where assets are constantly rebalanced based on market movements.

Teller, on the other hand, operates on a peer-to-peer lending model—the protocol doesn't use AMMs or traditional liquidity pools.

Lenders supply assets, borrowers repay with interest, and there’s no automated rebalancing or price exposure. This means funds aren’t subject to value fluctuations caused by market shifts— simply earn yield on the asset lent.

Teller’s Lending Model:

1. Isolated Lending Pools

Each lending pool on Teller is isolated, meaning lenders supply only one asset rather than pairing two.

This removes the need for automatic rebalancing and prevents exposure to price fluctuations between two assets. Lent funds stay in the form they were deposited.

2. One-Sided Lending (No Liquidity Pairing)

Unlike AMMs where liquidity providers must deposit two assets, Teller allows lenders to supply a single asset—no need to pair it with another.

This means the principal remains intact, and yield comes from borrower interest rather than trading fees or price shifts.

3. Collateralized Borrowing Instead of Trading Exposure

In AMM-based liquidity pools, funds are actively traded as users swap assets, causing price divergence and impermanent loss.

Teller, however, operates on a collateralized borrowing model, where borrowers lock up collateral to take loans. Funds aren’t exposed to trading volatility—they’re loaned out and repaid with interest.

Some Examples of Where Impermanent Loss Is a Potential Risk

  • Providing liquidity on Uniswap (ETH/USDC pair) → If ETH’s price rises or falls significantly, your balance of ETH and USDC will shift, potentially leaving you with less value than if you had just held the assets.
  • Yield farming on Curve (stables vs volatile assets) → Even in pools with stablecoins, depegging events can cause losses if one asset loses value against the other.
  • Depositing into a Balancer pool with multiple assets → Balancer pools hold more than two tokens, but the risk remains—if any asset moves in price, your holdings will be rebalanced, leading to impermanent loss.
  • Providing liquidity for memecoins or long-tail assets → Highly volatile assets can see extreme price swings, meaning the risk of IL is much higher in these pools.

Since Teller uses lending markets instead of liquidity pools, lenders don’t face these risks—their funds stay in the form they were lent, and yield comes from interest payments, not trading fees.

Ready to start earning without IL risk?

Official Teller links below: