Impermanent Loss Explained: The Risk Every LP Must Know
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What Is Impermanent Loss?
Impermanent loss (IL) is the difference in value between holding tokens in a wallet versus providing them as liquidity in an AMM (Automated Market Maker) pool like Uniswap or Curve.
When you provide liquidity to a 50/50 pool (e.g. ETH/USDC), the AMM automatically rebalances your position as prices change. If ETH rises significantly, arbitrageurs buy ETH from the pool, leaving you with less ETH and more USDC than you started with. If you had simply held your tokens, you'd have more value.
A Real Example
Suppose you deposit $10,000 into an ETH/USDC pool when ETH = $2,000. You provide 2.5 ETH + $5,000 USDC.
Now ETH rises to $4,000 (2x). Arbitrageurs rebalance the pool. You now have approximately 1.77 ETH + $7,071 USDC — a total of ~$14,142.
If you had simply held your 2.5 ETH + $5,000 USDC, you'd have $10,000 + $5,000 = $15,000. The difference ($858) is your impermanent loss — about 5.7%.
The IL Formula
The formula for calculating impermanent loss is: IL = 2 × √r / (1 + r) - 1, where r is the price ratio change of one token relative to the other.
Use our free Impermanent Loss Calculator to instantly see how much IL you would suffer for any price change.
How to Minimize Impermanent Loss
- Provide stablecoin liquidity: USDC/USDT or DAI/USDC pools have near-zero IL because both assets are pegged to $1.
- Use Uniswap V3 concentrated liquidity: By providing liquidity in a narrow price range, you earn more fees and can set ranges where IL is acceptable to you.
- Choose correlated pairs: ETH/stETH or BTC/WBTC pairs move together and have low IL.
- Ensure fee income exceeds IL: High-volume pools generate more fees. IL is only a problem if your fee income doesn't compensate for it.
- Monitor and rebalance: Withdraw liquidity if a token's price moves significantly outside your expected range.