Impermanent loss is the difference in value between holding tokens in an AMM liquidity pool versus simply holding them in your wallet. When the price ratio of the pooled tokens changes, the pool automatically rebalances (selling the appreciating token and buying the depreciating one), leaving you with less value than if you had just held. The loss is called "impermanent" because the loss reverses if prices return to their original ratio.
What Is Impermanent Loss?
3 min read
The short version
You deposit equal value of ETH and USDC into a pool. ETH doubles in price. The pool automatically sold some of your ETH as it rose (that is how AMMs maintain balance). You end up with more USDC and less ETH than you started with, and the total is worth less than if you had just held your original ETH + USDC. That gap is impermanent loss. You still earned trading fees, which may or may not compensate for the loss.
How It Works
In a constant-product AMM (x × y = k): when ETH price rises, arbitrageurs buy the cheap ETH from the pool until the pool price matches the market. This removes ETH and adds USDC to the pool. Your share now contains relatively more USDC and less ETH. The math for a 50/50 pool: if ETH goes 2x, your LP position is worth about 94.3% of what holding would be (5.7% IL). If ETH goes 5x: ~76.4% of holding value (23.6% IL). The loss is "impermanent" because if ETH returns to the original price, the rebalancing reverses and IL goes to zero. But if you withdraw while prices are different from entry, the loss becomes permanent (realized). Trading fee income offsets IL, in high-volume pools, fees often exceed IL, making LP profitable despite the rebalancing cost.
Calculating IL on a $10,000 ETH/USDC position
You deposit $5,000 ETH (1.667 ETH at $3,000) + $5,000 USDC into Uniswap. Total: $10,000. ETH rises to $4,500 (50% increase). If you had just held: 1.667 ETH × $4,500 + $5,000 USDC = $12,500. Your LP position (after pool rebalancing): ~$12,247. Impermanent loss: $12,500 - $12,247 = $253 (2.0% of holding value). Over the same period, if the pool earned $400 in fees (from trading volume), your net result: $12,247 + $400 = $12,647, still better than holding ($12,500). Whether LP is worth it depends on fee income vs. IL. High-volume pools with correlated assets (stablecoin pairs) have minimal IL and often win easily.
What People Get Wrong
Impermanent loss means you lose money
IL is a relative loss vs. holding, not necessarily an absolute loss. If both tokens appreciate and you earn fees, your LP position can still grow in dollar terms. IL just means it grew less than a pure hold would have.
IL only happens when prices drop
IL occurs whenever the price ratio changes in either direction. If you provide ETH/USDC and ETH doubles OR halves, you experience IL. The further prices move from the entry ratio (in any direction), the larger the IL.
Stablecoin pools have zero IL
Stablecoin pools (USDC/USDT, DAI/USDC) have near-zero IL because the price ratio barely moves. "Near-zero" is not exactly zero, if a stablecoin depegs, the pool absorbs the depegging token and IL materializes dramatically. But under normal conditions, stablecoin LPing is the lowest-IL strategy.
You can avoid IL by choosing the right pool
You can minimize IL (correlated pairs, concentrated liquidity ranges that match expected movement) but cannot eliminate it in any pool where prices can diverge. The only zero-IL position is one where both tokens maintain exactly the same price ratio indefinitely.
Keep Reading
Sources & Further Reading
- Uniswap V3 LP Math
Official explanation of concentrated liquidity and its impact on IL
Questions People Also Ask
- How much IL should I expect?
- For major pairs (ETH/USDC): expect 2-10% IL over months in a trending market. For volatile small-cap pairs: IL can exceed 30-50%. Stablecoin pairs: typically <0.1%. Always model IL against expected fee income before depositing.
- Do concentrated liquidity positions have more IL?
- Yes. Uniswap V3 concentrated positions amplify both fee income AND impermanent loss. A tighter range earns more fees but suffers more IL (and goes out of range faster). It is a leverage multiplier on both sides.
- Can I hedge impermanent loss?
- Partially. Some strategies: holding a long position in the volatile asset alongside LP (so your non-LP holding benefits from price increases that cause IL), using options to hedge directional exposure, or using protocols that offer IL insurance (limited availability, additional cost).