What is impermanent loss in DeFi liquidity pools?

Impermanent loss (IL) is the difference in value between holding tokens in a liquidity pool versus simply holding (HODLing) them in your wallet. It occurs because AMM pools (like Uniswap or Curve) rebalance automatically as prices change — selling the appreciating token and buying the depreciating one. The loss is 'impermanent' because it only becomes permanent when you withdraw your liquidity.

How is impermanent loss calculated?

For a standard 50/50 AMM pool, IL is calculated as: IL = 2√r/(1+r) − 1, where r = new price / initial price. For example, if the price of the deposited token doubles (r=2): IL = 2×√2/(1+2) − 1 = 2×1.414/3 − 1 = −5.72%. This means your LP position is worth 5.72% less than if you had just held the tokens. At a 4× price increase, IL reaches approximately 20%.

Can impermanent loss be offset by LP fees?

Yes — LP fees are the primary mechanism for compensating liquidity providers for impermanent loss. High-volume pools (like BTC/USDT or ETH/USDC on Uniswap) can generate 5–20%+ APY in fees depending on trading volume and pool tier. If the fee APY exceeds the impermanent loss over your holding period, you profit from providing liquidity. The calculator shows the exact fee percentage needed to break even.

Which LP pools have the lowest impermanent loss?

Impermanent loss is lowest when the two pooled tokens are highly correlated in price. Stablecoin/stablecoin pools (e.g., USDC/USDT) have near-zero IL since both tokens maintain the same value. ETH/stETH or WBTC/BTC pools also have very low IL. The highest IL risk comes from pools pairing a volatile asset with a stablecoin (e.g., ETH/USDC) — a 100% price rise in ETH creates ~5.7% IL, and a 4× rise creates ~20% IL.

Free Tools Impermanent Loss Calculator

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DeFi & Yield

Impermanent Loss Calculator

Enter your initial token price, current price, and deposit size to calculate impermanent loss for a 50/50 Uniswap-style liquidity pool — see your LP value, HODL value, and exact dollar loss from IL.

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How This Tool Works

Impermanent loss measures how much less your LP position is worth compared to simply holding the same tokens, due to the AMM's automatic rebalancing.

IL = 2√r / (1 + r) − 1 where r = new price / initial price

LP Value = Initial Deposit × √r
HODL Value = Initial Deposit / 2 × (r + 1)

Example: deposit $10,000 at $2,000/ETH. Price doubles to $4,000 (r=2): LP value = $10,000 × √2 = $14,142. HODL value = $10,000/2 × 3 = $15,000. IL = −$858 (5.72% loss vs HODL). Trading fees must exceed this loss over your holding period to make providing liquidity worthwhile.

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