What Is Impermanent Loss?

Impermanent loss (IL) is the loss a liquidity provider experiences when the prices of the tokens in a pool change relative to when they were deposited. Compared to simply holding the tokens, the pool is worth less. It is called "impermanent" because if the prices return to their original ratio, the loss disappears.

Why It Happens

A constant-product liquidity pool keeps a fixed product of its two token balances. When one token's price rises, the pool automatically sells some of it and buys the other — it rebalances. This means the pool holds less of the token that went up and more of the one that went down than a holder would.

A Simple Example

You deposit 1 ETH ($1,000) and 1,000 USDC ($1,000) into a pool. ETH then doubles to $2,000. The pool rebalances, so you now hold about 0.707 ETH and 1,414 USDC — worth about $2,828 total. If you had simply held your original 1 ETH + 1,000 USDC, you would have $3,000. The ~$172 difference is your impermanent loss.

When It Becomes Permanent

The loss is only "impermanent" while prices can return. If you withdraw while prices are still diverged, the loss is realized and becomes permanent.

What Offsets It

Pools earn trading fees and sometimes reward tokens. If those earnings exceed the impermanent loss, providing liquidity is still profitable. The decision is: fees + rewards vs the cost of IL.

How to Model It

Use the Impermanent Loss Calculator to estimate the loss for any price change. Larger price divergence means larger IL; pools with stablecoin pairs have very low IL because the ratio barely moves.

Frequently Asked Questions

Is impermanent loss guaranteed? No. It only appears when the token price ratio changes. If prices stay constant, there is no IL.

Do stablecoin pairs have impermanent loss? Very little, because both tokens hold roughly the same value, so the ratio rarely moves much.

Can rewards make up for it? Yes, if trading fees and reward tokens exceed the loss over your holding period.

Continue Learning

• Liquidity Pools Explained — The pools where IL happens
• What Is Yield Farming? — Strategies that face IL
• What Is DeFi? — The broader ecosystem

This article is for educational purposes only and is not financial advice.