What is impermanent loss & why every LP must understand it
Impermanent loss (IL) is the opportunity cost of depositing two tokens into a 50/50 liquidity pool instead of just holding them in your wallet. When you provide liquidity to an automated market maker (AMM) like Uniswap, Curve or PancakeSwap, you don't keep a fixed quantity of each token. The pool constantly rebalances your share so that the two sides stay equal in value — and that rebalancing quietly works against you whenever prices diverge.
Here's the mechanism. An AMM keeps the product of the two token balances constant (the famous x · y = k invariant). When Token A's price rises, arbitrage traders buy A out of the pool until its pool price matches the wider market. That means the pool sells your appreciating asset and accumulates more of the lagging one. You end up under-exposed to the winner and over-exposed to the loser compared with someone who simply held. The dollar gap between "what I'd have if I held" and "what my LP position is now worth" is the impermanent loss.
It's called impermanent because the loss is only realised when you withdraw while prices are diverged. If the price ratio drifts back to where you deposited, the gap closes to zero. But "impermanent" is a dangerously soft word: if you exit at a diverged ratio — or the move is permanent, as most large trends are — the loss is very real. Understanding IL is non-negotiable for any liquidity provider, because a pool can advertise a juicy APR while quietly handing back less than you'd have made doing nothing.
How to use this calculator
- Enter Token A's price at deposit and now. Token A is your volatile asset — ETH, SOL, a governance token, whatever you're providing. The defaults model ETH going from $2,000 to $3,000.
- Enter Token B's prices. For a token/stablecoin pool, leave Token B at 1 → 1 so only one side moves. For a volatile/volatile pool (e.g. ETH/BTC), enter both real prices.
- Set your total deposit value — the dollars you put in, split 50/50. This converts the percentage loss into a dollar figure.
- Read the headline IL%, then compare "If you HODL'd" against "If you provided liquidity." The Difference (IL in $) is what the pool cost you versus holding.
- Use the two return rows to see the whole picture: the pool can still be up in dollar terms while underperforming a simple HODL — that gap is the IL.
Everything updates as you type. Remember the figure is before fees and rewards; in a real pool those earnings are what you weigh against the loss shown here.
The formula
For a 50/50 constant-product (Uniswap-style) pool, define each token's price ratio as its price now divided by its price at deposit:
The numerator uses the geometric mean of the two price ratios (what your LP position tracks), while the denominator uses the arithmetic mean (what a simple HODL tracks). Because the geometric mean is always ≤ the arithmetic mean, IL% is always zero or negative — providing liquidity never beats holding on price alone; it can only break even (when prices don't diverge) or lose.
To turn that into dollars, the calculator builds both portfolios from your deposit. Half your deposit buys Token A and half buys Token B at the deposit prices, fixing the quantities you'd hold:
Worked example
You deposit $1,000 into an ETH/stablecoin pool with ETH at $2,000 and the stablecoin at $1. So $500 buys 0.25 ETH and $500 buys 500 units of the stable. ETH then rises to $3,000 while the stable stays at $1. The ratios are rA = 3000/2000 = 1.5 and rB = 1.
Plug in: IL% = 2 · √(1.5 · 1) / (1.5 + 1) − 1 = 2 · 1.2247 / 2.5 − 1 = 0.9798 − 1 ≈ −2.02%. If you'd simply held, your 0.25 ETH + 500 stable would be worth $1,250. In the pool you'd have about $1,224.74 — roughly $25 less. You're still up on the deposit, but you gave up about 2% to impermanent loss. That ~$25 is what your trading fees need to beat to make the pool the better choice.
The impermanent loss table
A quick reference for how much IL a given move in one token (the other held stable) produces. Use it to sanity-check before you even open the calculator:
- 1.25× price change → about −0.6%
- 1.5× → about −2.0%
- 2× → about −5.7%
- 3× → about −13.4%
- 5× → about −25.5%
Two things stand out. First, IL is symmetric — a token halving (0.5×) produces the same ~5.7% loss as a doubling (2×), because what matters is the divergence in the ratio, not the direction. Second, the loss accelerates: a 2× move costs under 6%, but a 5× move costs over a quarter of your value. The deeper a trend runs, the more painful providing liquidity becomes relative to holding.
When fees & yield outweigh IL
Impermanent loss is only one side of the ledger. The reason LPs provide liquidity at all is the income: a cut of every swap's trading fee, plus any farming or incentive rewards. The real question is never "will I have impermanent loss?" (you almost always will) but "will my fees and rewards exceed it?"
That tips in your favour when:
- Volume is high relative to liquidity — more swaps means more fees flowing to your share.
- Price is range-bound — lots of two-way trading generates fees while the ratio keeps returning toward your entry, so IL stays small.
- Your time in the pool is long enough for accumulated fees to compound past the loss.
It tips against you when a token makes a large, one-directional move and keeps going: the IL keeps growing while fees can't catch up. A pool showing "120% APR" can still leave you behind a HODL if the underlying token 3×'d, because that ~13% IL plus the chance you'd have ridden the full move outweighs the yield. Always model the price scenario you actually expect, then compare it to the fee APR.
Stable-pair vs. volatile-pair pools
The single biggest lever on your IL risk is what you pair.
Stable-stable pools (USDC/USDT, DAI/USDC) carry almost no impermanent loss because both legs target $1 — the ratio barely moves, so IL stays near zero. Returns are lower and you're exposed to de-peg and smart-contract risk, but for parking stablecoins they're among the lowest-risk yield sources in DeFi. Specialised AMMs like Curve concentrate liquidity around the peg to squeeze out even more fees with minimal IL.
Correlated pairs (ETH/stETH, wBTC/BTC, ETH/BTC) sit in the middle: the two assets tend to move together, so their ratio drifts slowly and IL accrues gently. Volatile/stable pairs (ETH/USDC, SOL/USDC) put one leg fully at the mercy of the market — every dollar the volatile token moves shows up as divergence, and that's where the table above bites hardest. Volatile/volatile uncorrelated pairs (e.g. a meme token paired with ETH) are the riskiest of all, since both legs can move violently in opposite directions.
How to reduce impermanent loss
- Pair correlated or pegged assets. Stable-stable and liquid-staking pairs keep the price ratio tight, so IL stays minimal.
- Chase fee yield, not just APR. Pick pools where realistic trading fees and rewards comfortably exceed the IL your expected price scenario implies — use the calculator above to quantify both sides.
- Mind your time horizon. IL grows with divergence; fees grow with time and volume. Short stints in choppy, high-volume pools favour the LP.
- Consider single-sided staking or CeFi Earn. Lending, staking and fixed-rate Earn products give yield with no impermanent loss because there's no second asset to rebalance against.
- Watch for IL-protected or concentrated-liquidity designs. Some protocols offer IL insurance or let you provide liquidity in a tight range — both change the trade-off (and add their own risks worth understanding first).
- Project your yield separately. Our compound interest calculator turns a fee/reward APR into a dollar figure you can weigh against the IL shown here.