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 your wallet versus providing them as liquidity in an AMM pool like Uniswap or Curve.
When you provide liquidity to a 50/50 pool, the AMM automatically rebalances as prices change. If ETH rises, arbitrageurs buy ETH from the pool, leaving you with less ETH and more USDC. If you had just held, you'd have more value.
A Real Example
You deposit $10,000 into an ETH/USDC pool when ETH = $2,000. You provide 2.5 ETH + $5,000 USDC.
ETH rises to $4,000 (2×). After rebalancing, you have ~1.77 ETH + $7,071 USDC = ~$14,142. But if you'd held your 2.5 ETH + $5,000 USDC = $15,000. The $858 difference is your 5.7% impermanent loss.
The IL Formula
IL = 2 × √r / (1 + r) − 1 where r = price ratio change. Use our Impermanent Loss Calculator to compute this instantly for any price change.
How to Minimize Impermanent Loss
- Stablecoin pairs: USDC/USDT or DAI/USDC have near-zero IL since both are pegged to $1
- Correlated pairs: stETH/ETH or WBTC/BTC move together — low IL
- Uniswap V3 concentrated liquidity: Narrow price ranges earn more fees, set ranges where IL is acceptable
- High-volume pools: Fee income must exceed IL — higher volume = more fees
- Monitor and withdraw: Exit liquidity if price moves significantly outside your expected range