What impermanent loss is
Automated market makers (AMMs) such as Uniswap hold two tokens in a pool and let anyone trade against it. The tokens come from liquidity providers (LPs), who earn a share of every trade's fee in return.
The pool keeps its two sides in balance by formula. When the market price of one token rises, arbitrage traders buy it from the pool until the pool price matches the market. Your share of the pool ends up with less of the token that went up and more of the one that did not. Compared with having just held both tokens in your wallet, you are worse off. That shortfall is impermanent loss.
A worked example
ETH trades at $2,000. You deposit $10,000 into an ETH/USDC pool: 2.5 ETH and 5,000 USDC. ETH then doubles to $4,000 (illustrative prices).
If you had held
- 2.5 ETH at $4,000 = $10,000
- 5,000 USDC = $5,000
- Total: $15,000
In the pool
- About 1.77 ETH at $4,000 = $7,071
- About 7,071 USDC = $7,071
- Total: $14,142
The position grew from $10,000 to $14,142, but holding would have given $15,000. The $858 difference, 5.7%, is the impermanent loss, before counting the fees you earned.
The formula and the curve
For a 50/50 constant-product pool, let r be the new price ratio (new price / entry price). The value of the position relative to holding is:
IL = 2 × √r / (1 + r) − 1
At r = 2: 2 × 1.414 / 3 − 1 = −5.7%. Drag the slider to see the loss for any move.
Impermanent loss
-5.72%
On a $10,000 deposit: -$858 vs holding
Assumes a 50/50 constant-product pool where the other token keeps its dollar value. Trading fees earned are not included.
Show data as a table
| Price change | Loss vs holding | On $10,000 |
|---|---|---|
| -90% | -42.50% | -$2,338 |
| -50% | -5.72% | -$429 |
| -25% | -1.03% | -$90 |
| 0% | 0.00% | -$0 |
| +25% | -0.62% | -$70 |
| +50% | -2.02% | -$253 |
| +100% | -5.72% | -$858 |
| +200% | -13.40% | -$2,679 |
| +400% | -25.46% | -$7,639 |
| Price change | IL | Hold value | LP value | Shortfall |
|---|---|---|---|---|
| 0.25x (−75%) | −20.0% | $6,250 | $5,000 | $1,250 |
| 0.5x (−50%) | −5.7% | $7,500 | $7,071 | $429 |
| 0.75x (−25%) | −1.0% | $8,750 | $8,660 | $90 |
| 1.25x (+25%) | −0.6% | $11,250 | $11,180 | $70 |
| 1.5x (+50%) | −2.0% | $12,500 | $12,247 | $253 |
| 2x (+100%) | −5.7% | $15,000 | $14,142 | $858 |
| 3x (+200%) | −13.4% | $20,000 | $17,321 | $2,679 |
| 5x (+400%) | −25.5% | $30,000 | $22,361 | $7,639 |
Two things stand out. Small moves cost little: 25% either way is about 1% or less. And the loss is symmetric in ratio terms: doubling and halving cost the same percentage, even though the dollar amounts differ.
Why it is called impermanent
The loss exists only on paper while you stay in the pool. If the price ratio returns to where it was when you deposited, it goes back to zero. It becomes permanent when you withdraw at a different ratio.
The name can mislead. If ETH doubles and stays there, the loss is as real as any other. A better mental model: a 50/50 pool constantly sells the token that is rising and buys the one that is falling. That works in a market that moves sideways and costs you in a market that trends.
Pool design, fees and reducing the risk
Correlated and stable pairs
Pairs that move together, such as USDC/USDT or ETH with a liquid staking token, keep their ratio and suffer little loss, as long as neither side loses its peg. Fees per trade are usually lower too.
Concentrated liquidity
Uniswap v3-style ranges earn more fees per dollar while the price stays inside the range, but amplify the loss when it moves. Outside the range you hold only the token that fell.
Weighted pools
Pools that hold, say, 80% of one token and 20% of the other (as on Balancer) rebalance less of your position, so the loss on the heavy side is smaller.
Fee income
Every trade pays the pool a fee. A busy pool can earn enough to cover the loss; a quiet one rarely does. Volume, not the advertised rate, decides it.
What matters is the net result: fees earned, minus impermanent loss, minus gas to enter, adjust and exit. Before you deposit, estimate the fees from the pool's real trading volume and your share of it, then check how much loss the price moves you consider likely would cost you.
Try your own numbers with the impermanent loss calculator, or read what a DEX is for how AMM pools work.