Last Updated: March 2026
If you’re providing liquidity in DeFi, impermanent loss is the most important risk you need to understand. It’s the hidden cost that can turn a profitable-looking yield farming position into a losing one. This guide explains it simply.
Impermanent Loss in Simple Terms
Impermanent loss (IL) occurs when the price of tokens in a liquidity pool changes compared to when you deposited them. The bigger the price change, the more IL you suffer. It’s called “impermanent” because the loss only becomes permanent when you withdraw—if prices return to your entry ratio, the loss disappears.
A Simple Example
You deposit $1,000 into an ETH/USDC pool: $500 of ETH (1 ETH at $500) and $500 of USDC.
ETH doubles to $1,000. If you had just held, you’d have: 1 ETH ($1,000) + $500 USDC = $1,500.
But in the liquidity pool, the AMM rebalances your position. You end up with approximately 0.707 ETH ($707) + $707 USDC = $1,414.
Impermanent loss: $1,500 – $1,414 = $86 (5.7%). You’re still profitable ($1,414 > $1,000), but you earned $86 less than simply holding.
Why Does It Happen?
AMMs (Automated Market Makers) like Uniswap use a mathematical formula to price tokens based on pool ratios. When prices change externally, arbitrage traders rebalance the pool—buying the cheap token and selling the expensive one. This rebalancing is what creates impermanent loss for LPs. See DEX guide.
How Much IL Can You Expect?
- 25% price change: ~0.6% IL
- 50% price change: ~2.0% IL
- 100% price change (2x): ~5.7% IL
- 200% price change (3x): ~13.4% IL
- 400% price change (5x): ~25.5% IL
IL increases with the magnitude of price change in either direction. It doesn’t matter if ETH goes up 2x or down 2x—the IL is the same.
When Is IL Worth It?
You provide liquidity to earn trading fees and token rewards. IL is worth it when:
- Trading fees exceed IL: High-volume pools (ETH/USDC on Uniswap) generate significant fees that can outweigh IL
- Additional token rewards: Many protocols offer token incentives on top of fees. See yield farming guide
- Stable pairs: Stablecoin pairs (USDC/USDT) have minimal IL because prices barely move. See stablecoin guide
- Correlated pairs: Pairs that move together (stETH/ETH) have lower IL
How to Minimize Impermanent Loss
- Choose stable pairs: USDC/USDT or stETH/ETH pools have near-zero IL
- Use concentrated liquidity wisely: Uniswap V3 lets you set price ranges, but narrow ranges amplify IL
- Provide liquidity in trending markets cautiously: Strong trends create more IL
- Calculate expected fees vs. IL: Only LP when fee income is expected to exceed potential IL
- Consider single-sided staking: Protocols like Lido let you earn yield without IL. See ETH staking guide
Impermanent Loss vs. Staking
This is why many DeFi users prefer staking over liquidity provision: staking has no impermanent loss. You deposit one token and earn yield on it. See our staking vs yield farming comparison.
Frequently Asked Questions
Can impermanent loss be permanent?
Yes—if you withdraw from the pool while prices have diverged from your entry point, the loss is realized and becomes permanent. If one token in your pair goes to zero (rug pull), you lose nearly everything.
Is impermanent loss always a loss?
In isolation, yes—you always end up with less than if you’d just held. But combined with trading fees and reward tokens, your total return can still be positive. The key is whether fees earned > IL suffered.
How do I calculate my impermanent loss?
Use an IL calculator (many are available online). Input your entry prices and current prices to see the exact IL percentage. Portfolio trackers like DeBank also show IL on active positions. See tracker guide.
