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.