Impermanent LossIL
Impermanent loss is how much worse off a liquidity provider is compared with simply holding the two tokens, caused by the pool rebalancing as their relative price changes. In a 50/50 constant-product pool, a 2× price change in one token means roughly 5.7% less value than holding. It becomes permanent when you withdraw.
Providing liquidity to an AMM pool earns trading fees, which sounds like free income. But the pool constantly rebalances as prices move, selling the rising token and buying the falling one. Compared with just holding the two tokens, that rebalancing costs you. This hidden cost is impermanent loss, and it is the main reason liquidity provision can underperform.
- Category
- Cryptocurrency and Blockchain
- Reading time
- 4 min
- Also called
- Divergence loss, IL, LP loss vs holding
- Updated
Impermanent loss in plain words
Liquidity providers deposit their assets into pools so traders can buy and sell them, in exchange for rewards.1
When prices move, the pool’s balance shifts and the provider can end up worth less than if they had just held. If the price returns to where it was, the loss disappears — which is why it is called impermanent.2
For a sense of scale: if one token's price doubles relative to the other, the position ends up about 5.7% behind simply holding.2 See Liquidity and Volatility.
How to estimate impermanent loss, step by step
Note the starting price
Record the price ratio of the two tokens when you deposit.
Find the price ratio now
Price ratio = current price ÷ starting price.
Apply the formula
IL = 2 × √(ratio) ÷ (1 + ratio) − 1.2
Compare with fees
Add fee income to the pool value; fees are what reward providers.2
Compare with holding
Net result = pool value + fees − value of simply holding.
Remember it can reverse
If the price returns to the starting ratio, the loss disappears.2
Worked examples
Example 1 — ETH doubles
−$343.15 vs holdingYou deposit 1 ETH and 2,000 USDC when ETH is a hypothetical $2,000 (total $4,000). ETH rises to $4,000.
| If held | 1 × $4,000 + $2,000 = $6,000 |
| In the pool | ≈0.7071 ETH + 2,828.43 USDC = $5,656.85 |
| Impermanent loss | $5,656.85 ÷ $6,000 − 1 ≈ −5.7% |
This matches the documented result: a 2× price change gives a 5.7% loss relative to holding.2
Example 2 — ETH halves
−$171.57 vs holdingSame deposit. ETH falls to $1,000 (ratio 0.5).
| If held | $1,000 + $2,000 = $3,000 |
| In the pool | ≈1.4142 ETH + 1,414.21 USDC = $2,828.43 |
| Impermanent loss | $2,828.43 ÷ $3,000 − 1 ≈ −5.7% |
The formula gives the same loss for a halving as for a doubling: 2 × √0.5 ÷ 1.5 − 1 ≈ −5.7%.2
Example 3 — Fees offset the loss
+$56.85 vs holdingIn Example 1 you also earned $400 of trading fees.
| Pool + fees | $5,656.85 + $400 = $6,056.85 |
| Holding | $6,000 |
| Net vs holding | +$56.85 |
Fees generated by trading are what reward providers, and here they more than cover the loss.2
Providing liquidity vs. holding
| Aspect | Providing liquidity | Holding both tokens |
|---|---|---|
| Income | Trading fees | None |
| When prices diverge | Impermanent loss | No rebalancing cost |
| Exposure | Shifts toward the falling token | Stays fixed |
| Extra risk | Smart contract risk | Wallet risk only |
When impermanent loss matters
Volatile pairs
Large price moves mean large impermanent loss.
Stablecoin pairs
Small moves mean little impermanent loss.
Yield comparisons
Judge LP returns net of impermanent loss.
Exit timing
Withdrawing makes the loss permanent.
Advantages and disadvantages
Advantages
- Fees can more than cover the loss.
- The formula makes the risk measurable.
- Loss shrinks if prices return to the start.
Disadvantages
- Large price moves cause large losses vs holding.
- The loss becomes permanent on withdrawal.
- Fees may be too low to compensate.
- Smart contract risk adds to price risk.
Going deeper
Read as far as you need. Each level builds on the one before it.
Worse than holding
Beginner
Providers deposit tokens into pools for rewards.1 If prices move, the pool can end up worth less than holding.
Why 'impermanent'
Advanced
If the price ratio returns to where it started, the loss disappears.2 Withdraw before that and it is locked in. Fees are the offset, so compare fee income with expected Volatility of the pair.
Common mistakes
Ignoring IL in APY
Comparing headline fee yields without the loss.
Thinking 'impermanent' means harmless
Withdrawing after a big move locks the loss in.
Pairing very volatile tokens
Expecting fees to cover any move.
Comparing with cash
IL is measured against holding the tokens, not against cash.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Impermanent loss compares an LP position with holding.
- It comes from the pool rebalancing as prices move.
- IL = 2 × √(ratio) ÷ (1 + ratio) − 1.
- A 2× move costs about 5.7% vs holding.
- Fees may offset it; withdrawal makes it permanent.
Frequently asked questions
Is impermanent loss a real loss?
Does it matter which way the price moves?
Do stablecoin pools have impermanent loss?
Further learning
- Liquidity
What liquidity providers supply.
- Volatility
The driver of impermanent loss.
- Correlation
Why correlated pairs lose less.
- Market Maker
The traditional role LPs play.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- ethereum.org. Ethereum Glossary (opens in a new tab) Checked .
- Uniswap Docs. Understanding Returns (Uniswap v2) (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.