Impermanent loss (IL) is the temporary loss liquidity providers (LPs) experience when the price of tokens in a liquidity pool changes.
Why It Happens
AMMs maintain a constant product (x × y = k). If one token’s price changes relative to the other, arbitrage traders profit from the imbalance, leaving the LP with a different ratio of tokens than they deposited.
Simple Example
| Step | ETH | USDC | Value (in USDC) |
|---|---|---|---|
| Deposit | 10 ETH | $20,000 | $40,000 |
| ETH price doubles to $4,000 | 7.07 ETH | $28,284 | $56,568 |
| If you held | 10 ETH = $40,000 + $20,000 | $60,000 |
IL = $60,000 - $56,568 = $3,432 (5.7%)
IL by Price Change
| Price Change | IL |
|---|---|
| ±10% | 0.4% |
| ±25% | 2.0% |
| ±50% | 5.7% |
| ±75% | 10.1% |
| ±100% | 13.4% |
| ±200% | 20.0% |
| ±400% | 25.0% |
When IL Becomes Permanent
IL is only “impermanent” if the price returns to the deposit price. If the price moves and stays, the loss is permanent.
How Fees Offset IL
| Pool | Daily Volume | LP Fee Share | Yield vs IL |
|---|---|---|---|
| ETH/USDC (Uniswap) | $500M | 0.01% per trade | 5-20% APY |
| Stable pairs (USDC/USDT) | $200M | 0.01% per trade | 0.1-1% APY |
High-volume pools with volatile pairs can offset IL with fees. Stable pairs have near-zero IL.
How to Minimise Impermanent Loss
| Strategy | How It Works |
|---|---|
| Stable pairs | USDC/USDT, DAI/USDC — near-zero IL |
| Concentrated liquidity (Uniswap v3) | Provide liquidity in a narrow range |
| Single-sided exposure | Some protocols protect against IL |
| IL insurance | Protocols like InsurAce |
| Fees vs IL analysis | Only LP if fees exceed potential IL |
| Time horizon | Short-term LP for high volume events |
IL in Stable Pools
| Pool | Typical IL |
|---|---|
| USDC/USDT | 0.01-0.1% |
| DAI/USDC | 0.05-0.2% |
| ETH/stETH | 0.1-0.5% |
Stable pools have minimal IL but lower fee yields.
IL in Volatile Pools
| Pool | IL Risk | Fee Yield Potential |
|---|---|---|
| ETH/USDC | High | High |
| PEPE/ETH | Very high | Very high |
| WBTC/ETH | Moderate | Moderate |
Should You Provide Liquidity?
| Situation | Decision |
|---|---|
| Bull market, high volume | Can be profitable with fees |
| Bear market, low volume | IL likely exceeds fees |
| Stable pairs | Low risk, moderate reward |
| Exotic pairs | High risk of IL |
| Short-term (days) | Risk of concentrated price moves |
| Long-term (months) | Time for fees to accumulate |
Bottom Line
Impermanent loss occurs when token prices diverge in an AMM pool. It ranges from 0% (stable pairs) to 25%+ (4× price change). Fees from trading can offset IL. Stable pairs have near-zero IL but lower yields. Only LP if you understand the potential loss and believe fees will outweigh it. Use IL calculators before depositing.
Deciding whether to provide liquidity
The right call depends on your time horizon, the pool’s volume, and your willingness to accept an asset mix you did not choose. Before depositing, run both the numbers and the scenario through your head rather than acting on a headline APY.
Start with the fee income. A volatile pair such as ETH/USDC on a busy pool can generate meaningful returns because trading volume is constant, but the same pair in a quiet, bearish market may earn fees far below the impermanent loss it suffers as prices drift apart. That is why high reported APYs on illiquid pools can be a trap: they often reflect the pool’s historical volume, not what you will actually collect, and the quoted figure rarely deducts IL.
Then decide on the asset mix you can tolerate. If price moves away from your entry, you wind up holding more of whichever token fell — effectively a forced buy of a losing asset. Ask yourself whether you are comfortable being left holding more of that coin. If the answer is no, a stable pair like USDC/USDT removes most of the risk at the cost of thin yields, or you might skip AMMs altogether and stake single-sided instead.
Finally, size the position so that a worst-case IL is survivable and meaningful to you, and set a mental or written stop — a price level where you would pull liquidity because fees are clearly not compensating the loss. Use an impermanent loss calculator, which is freely available, to compare expected fees against potential IL for the price range you expect. Treat any deposit as a considered decision you are willing to justify after the fact, not an easy passive yield.