What is Impermanent Loss?
Impermanent Loss (IL) is the difference between holding tokens in a liquidity pool vs. simply holding them in your wallet. When you provide liquidity to an AMM (Automated Market Maker), the pool automatically rebalances your position as prices change.
The "loss" is called impermanent because it only becomes realized when you withdraw. If prices return to their original ratio, the loss disappears. However, in practice, prices rarely return exactly—and fee earnings may or may not compensate for IL.
Price Goes Up
Pool sells your winning token, you end up with less of it than HODL.
Price Goes Down
Pool buys more of the losing token, you end up with more of it than HODL.
Price Returns
If price returns to entry, IL = 0. But you still earned fees during this time!
Impermanent Loss Calculator
Impermanent loss exceeds fee earnings
IL vs Price Change Visualization
LP Position Simulator
1Initial Position
2After Price Change
AMM Rebalancing: When ETH price increases, the pool automatically sells ETH for USDC to maintain balance. This is why you end up with less ETH than you started with. The "loss" becomes permanent only when you withdraw.
Strategies to Minimize Impermanent Loss
Use Stablecoin Pairs
Low RiskUSDC/USDT or DAI/USDC pools have near-zero IL as both assets maintain ~$1 peg.
Correlated Asset Pairs
Medium RiskwBTC/ETH tends to move together, reducing IL compared to ETH/USDC.
High Fee Pools
High RiskVolatile pairs with high trading volume can offset IL with fees (1% fee tier).
Concentrated Liquidity
Variable RiskUniswap V3 lets you set price ranges. Narrower = more fees but higher IL risk.
Single-Sided Staking
Low RiskSome protocols allow single-asset deposits, eliminating IL entirely.
IL Protection Protocols
Low RiskBancor, Thorchain offer IL insurance after minimum deposit periods.
The IL Formula
IL = 2 × √(price_ratio) ÷ (1 + price_ratio) - 1Where price_ratio = new_price / original_price. This formula assumes a constant product AMM (x × y = k) like Uniswap V2.
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