What is Impermanent Loss?
Impermanent loss (IL) is the difference in value between holding tokens in your wallet versus providing them as liquidity to an AMM pool. It occurs when the price ratio of the two pooled tokens changes after you deposit.
It’s called “impermanent” because if the prices return to their original ratio, the loss disappears. However, in practice, prices rarely return to the exact starting point, making the loss effectively permanent when you withdraw.
Every liquidity provider experiences impermanent loss — it’s a mathematical certainty whenever token prices move. The question isn’t whether you’ll experience IL, but how much.
How Impermanent Loss Works
The Math
When you provide liquidity to a 50/50 pool (like Uniswap V2), you’re effectively selling one token as it goes up in price and buying it as it goes down. This is the opposite of what a profitable trader would do.
Consider depositing 1 ETH + $3,000 USDC (total $6,000) into an ETH/USDC pool:
| ETH Price Change | Hold Value | Pool Value | Impermanent Loss |
|---|---|---|---|
| +50% ($4,500) | $7,500 | $7,348 | -2.0% |
| +100% ($6,000) | $9,000 | $8,485 | -5.7% |
| +200% ($9,000) | $12,000 | $10,392 | -13.4% |
| +400% ($15,000) | $18,000 | $13,416 | -25.5% |
| -50% ($1,500) | $4,500 | $4,243 | -5.7% |
| -75% ($750) | $3,750 | $3,000 | -20.0% |
As you can see, any price movement causes IL. The larger the divergence, the bigger the loss — and it’s asymmetric, meaning both up and down movements hurt.
Why It Happens
The AMM formula (x × y = k) forces the pool to constantly rebalance. When ETH goes up:
- The pool sells your ETH (because traders buy ETH from the pool)
- You end up with more USDC and less ETH
- You’ve effectively sold ETH at a lower-than-market price
The pool is always doing the opposite of “buy low, sell high.”
Impermanent Loss vs Trading Fees
IL isn’t the whole picture. Liquidity providers also earn trading fees. The real question is: do fees compensate for IL?
For high-volume pairs:
- Trading fees may exceed IL, resulting in net profit
- Token incentives (farming rewards) further offset IL
- Net result can be positive even with significant IL
For low-volume pairs:
- IL dominates because there aren’t enough fees to compensate
- You’re better off just holding the tokens
On Uniswap V2, a pool needs roughly 15-30% of its TVL in daily volume for fees to offset typical IL. Major pairs like ETH/USDC usually meet this threshold; obscure token pairs usually don’t.
Minimizing Impermanent Loss
1. Provide Liquidity to Correlated Pairs
Stablecoin pairs (USDC/USDT, DAI/USDC) have near-zero IL because the prices rarely diverge:
| Pair | Typical IL | Typical APY | Risk Profile |
|---|---|---|---|
| USDC/USDT | <0.1% | 5-10% | Very low |
| ETH/wstETH | <0.5% | 5-8% | Low |
| ETH/USDC | 5-15% | 15-30% | Medium |
| Random token / ETH | 20-50%+ | 50-200%+ | Very high |
2. Use Concentrated Liquidity (Uniswap V3)
V3 lets you choose tight price ranges. If prices stay in your range, you earn significantly more fees with less capital. But if prices exit your range, you stop earning fees and your position becomes 100% the weaker token.
3. Hedging Strategies
Advanced LPs use derivatives (perps, options) to hedge their IL exposure. For example:
- Provide ETH/USDC liquidity
- Short ETH on a perp DEX to offset directional exposure
- Net result: earn fees while being delta-neutral
4. Use Single-Sided Protocols
Some protocols (like Bancor V3) offer single-sided liquidity with IL protection — the protocol absorbs IL after a minimum staking period (usually 100 days).
Frequently Asked Questions
Q: Is impermanent loss guaranteed? A: Any price movement causes IL. The only scenario with zero IL is if both token prices remain exactly the same ratio as when you deposited. Stablecoin pairs come closest to this.
Q: When does impermanent loss become permanent? A: When you withdraw your liquidity. At that point, the loss is locked in. Some LPs choose to wait for prices to return rather than crystallize the loss.
Q: How do I calculate my impermanent loss? A: Compare your current pool value to what you’d have if you’d simply held the tokens. Our Impermanent Loss Calculator does this for you.