How Impermanent Loss Works
Impermanent loss occurs when the price ratio of tokens in a liquidity pool changes relative to when you deposited. The larger the divergence, the more value you lose compared to simply holding the tokens. It is called "impermanent" because the loss reverses if prices return to the original ratio — but in practice, that rarely happens.
Automated Market Makers (AMMs) like Uniswap use the constant product formula x × y = k. As arbitrageurs rebalance the pool after external price moves, the pool ends up holding more of the cheaper token and less of the expensive one. The net result: your position is worth less than if you had just held the two assets in your wallet.
The Formula
IL = 2 × √r ⁄ (1 + r) − 1
- r = Price ratio = new price / original price of the volatile asset
- IL = Impermanent loss as a decimal (multiply by 100 for %)
At a 2x price change, IL ≈ 5.7%. At 5x, IL ≈ 25.5%. The loss accelerates non-linearly — this is why concentrated-liquidity positions on Uniswap v3 are even riskier if ranges are set too tightly.
Example Calculation
Imagine you deposit 1 ETH + 3,000 USDC into an ETH/USDC pool when ETH = $3,000. Total value: $6,000.
ETH then rises to $4,500 (r = 1.5). Applying the formula:
IL = 2 × √1.5 / (1 + 1.5) − 1
IL = 2 × 1.2247 / 2.5 − 1
IL = 0.9798 − 1 = −0.0202 → −2.02%
If you had held, your portfolio would be worth $7,500 (1 ETH @ $4,500 + $3,000). As an LP, your position is worth roughly $7,348 — a $152 shortfall. Whether the trading fees you earned exceed that $152 determines if the LP position was worth it.
Best Impermanent Loss Calculators
| Tool | Chain Support | Concentrated LP | Price |
|---|---|---|---|
| ILCalculator.net | Any (manual) | No | Free |
| DailyDeFi IL Tool | Ethereum, BSC | No | Free |
| APY.vision | 10+ chains | Yes (Uni v3) | Free + Pro $9/mo |
| Revert Finance | Ethereum, Polygon, Arbitrum | Yes (Uni v3) | Free |
| DeBank | 200+ protocols | No | Free |
Tips for Using This in Trading
- Always compare IL vs fees. A pool with 0.3% swap fees and high volume can easily outpace 2-3% IL.
- Use stablecoin pairs for lower IL. USDC/DAI pools have near-zero IL but also lower yields.
- Hedge with a short position. If you LP ETH/USDC, shorting 0.5 ETH on a futures exchange neutralises directional risk.
- Set alerts for price divergence. Pull liquidity before IL exceeds your fee earnings.
- Prefer correlated pairs. ETH/stETH or BTC/WBTC pools minimise price divergence.
Common Mistakes
- Ignoring IL entirely. Many LPs only look at APY without subtracting impermanent loss.
- Using tight ranges on Uni v3 without monitoring. Concentrated liquidity amplifies IL dramatically.
- Assuming IL is always impermanent. If a token crashes 90% and never recovers, the loss is very permanent.
- Forgetting about gas costs. Entering and exiting an LP position on Ethereum L1 can cost $50-$200 in gas.
Frequently Asked Questions
What is impermanent loss in simple terms?
Impermanent loss is the difference between holding tokens in your wallet versus depositing them in a liquidity pool. When token prices change, the AMM rebalances your position, leaving you with less value than if you had simply held.
How much impermanent loss can I expect?
It depends on price movement. A 2x price change causes roughly 5.7% IL, a 3x change causes about 13.4%, and a 5x change results in approximately 25.5% loss compared to holding.
Can trading fees offset impermanent loss?
Yes. High-volume pools with significant trading fees can more than compensate for IL. Always compare the fee APR against the expected IL for the price range you anticipate.
Does impermanent loss apply to stablecoin pools?
Stablecoin-only pools (e.g., USDC/DAI) experience near-zero impermanent loss because both assets are pegged to the same value. They offer lower yields but much safer LP positions.