TL;DR: Impermanent loss is the gap between what your tokens are worth inside an AMM liquidity pool and what they would be worth if you had simply held them in your wallet. It happens whenever the price ratio of the two pooled tokens moves away from the ratio at your deposit, in either direction. In a standard 50/50 pool, a 2x price move costs about 5.7% versus holding, a 5x move about 25.5%. Trading fees can offset it, the loss only becomes permanent when you withdraw, and stablecoin pairs or carefully managed ranges reduce it. Concentrated liquidity earns more fees but magnifies the loss.
You deposit two tokens into a decentralized exchange pool, earn trading fees every day, and still end up with less money than if you had left both tokens untouched. That gap is called impermanent loss, and it is the single most misunderstood risk of providing liquidity in DeFi.
If you are new to how pools work, start with our explainer on how liquidity pools support crypto launchpads, which covers the basic mechanics of pooled tokens and liquidity provider (LP) tokens. This guide goes one step further and focuses only on the downside: why an LP position loses value against a simple hold, how to calculate that loss, and what you can do about it.
What Is Impermanent Loss?
Impermanent loss (IL) is the difference in value between two strategies that start with the same tokens:
- Hold: keep token A and token B in your wallet.
- Provide liquidity: deposit the same token A and token B into an automated market maker (AMM) pool.
When the relative price of the two tokens changes, the LP position is worth less than the hold position, before counting fees. The loss is called "impermanent" because if prices return exactly to the ratio at your deposit, the gap disappears. If you withdraw while prices are still away from that ratio, the loss is locked in and becomes very real.
Uniswap describes this risk directly. In its Uniswap v3 announcement (March 2021), the Uniswap team wrote that v2 LPs earn fees on only a small portion of their capital, which "can fail to appropriately compensate for the price risk ('impermanent loss') they take by holding large inventories in both tokens."
Why Providing Liquidity Can Lose Money vs Holding
Most AMMs, such as Uniswap v2 and PancakeSwap v2, use the constant product formula:
x × y = k
Here x is the amount of token A in the pool, y is the amount of token B, and k is a constant that stays fixed between deposits and withdrawals (ignoring fees). The pool does not ask any outside source for the price. Its price is simply y ÷ x.
When the market price of token A rises on other exchanges, the pool's price is now too cheap. Arbitrage traders buy token A from the pool and sell it elsewhere until the pool price matches the market. Each trade removes token A from the pool and adds token B. The result for you as an LP:
- When token A goes up, the pool automatically sells your token A on the way up. You end up with less of the winner.
- When token A goes down, the pool automatically buys more token A on the way down. You end up with more of the loser.
In other words, a liquidity pool behaves like a strategy that always sells strength and buys weakness. That works well in a sideways market, but it falls behind a simple hold whenever prices trend strongly in one direction. In a 2021 paper on Uniswap v3, researchers Stefan Loesch and colleagues describe impermanent loss as the "Gamma" component of this trading strategy: the risk LPs take on in exchange for fee income.
A Worked Example With Real Numbers
Assume ETH trades at $2,000 and you deposit 1 ETH plus 2,000 USDC into a 50/50 constant product pool. Your deposit is worth $4,000, and for simplicity you own the whole pool.
- Starting pool: 1 ETH × 2,000 USDC, so k = 2,000.
Scenario 1: ETH doubles to $4,000. Arbitrage rebalances the pool until the price is $4,000 while x × y still equals 2,000. The pool now holds about 0.7071 ETH and 2,828.43 USDC.
- LP position value: 0.7071 × $4,000 + $2,828.43 = $5,656.85
- Hold value: 1 × $4,000 + $2,000 = $6,000
- Impermanent loss: $343.15, or 5.72% versus holding
Scenario 2: ETH halves to $1,000. The pool now holds about 1.4142 ETH and 1,414.21 USDC.
- LP position value: 1.4142 × $1,000 + $1,414.21 = $2,828.43
- Hold value: 1 × $1,000 + $2,000 = $3,000
- Impermanent loss: $171.57, or again 5.72% versus holding
Two lessons stand out. First, the LP position still gained money in Scenario 1 (from $4,000 to $5,656.85). Impermanent loss is a loss against holding, not necessarily a loss against your initial deposit. Second, a 2x rise and a 50% fall produce the same percentage IL, because what matters is the change in the price ratio, not the direction.
Impermanent Loss Formula and Calculator Table
For a standard 50/50 constant product pool, if r is the new price ratio divided by the starting price ratio, the impermanent loss is:
IL = 2 × √r ÷ (1 + r) − 1
You can use this formula as a simple impermanent loss calculator in any spreadsheet. Plugging in common price changes gives the following table (fees excluded):
| Price change of one token vs the other | Ratio r | Impermanent loss vs holding |
|---|---|---|
| +10% | 1.10 | −0.11% |
| +25% | 1.25 | −0.62% |
| +50% | 1.50 | −2.02% |
| 2x (+100%) | 2.00 | −5.72% |
| 3x (+200%) | 3.00 | −13.40% |
| 4x (+300%) | 4.00 | −20.00% |
| 5x (+400%) | 5.00 | −25.46% |
| −25% | 0.75 | −1.03% |
| −50% | 0.50 | −5.72% |
| −75% | 0.25 | −20.00% |
| −90% | 0.10 | −42.50% |
Small moves barely matter. Large moves, especially the 3x pumps and 90% crashes common with newly listed tokens, can eat a large share of your capital relative to just holding.
Note the limits of this formula. It applies to 50/50 constant product pools only. Weighted pools (for example 80/20 pools on Balancer), stable-swap curves such as Curve, and concentrated liquidity positions each have different IL profiles, so use the calculator built into the specific protocol or a dedicated third-party tool for those.
KEY TAKEAWAYS
- Impermanent loss compares an LP position with simply holding the same tokens, not with your starting deposit.
- It depends on how far the price ratio moves, in either direction: 2x or −50% both cost about 5.72%.
- The loss is only realized when you withdraw while prices are away from your entry ratio.
- Fees are the only thing that pays you for this risk, so compare expected fees with expected volatility before depositing.
When Does Impermanent Loss Happen?
Impermanent loss grows in four common situations:
- Volatile pairs. Pairing a volatile token with a stablecoin (for example a new token / USDT pair) exposes you to the full price swing of that token.
- Uncorrelated pairs. Two tokens that move independently, such as a gaming token paired with ETH, can drift apart for long periods.
- Strong trends. A token that pumps 5x or crashes 90% during your deposit creates the largest gaps, as the table shows.
- Thin, early markets. Fresh listings after a token generation event often see the biggest price moves of their life in the first days, exactly when early LPs are most exposed.
That last point is especially relevant for launchpad participants. We explained in our analysis of IDO ROI and the post-listing exit trap how new tokens often swing wildly once trading opens. Adding liquidity to such a pool on day one combines that volatility with impermanent loss, so the risk can stack up quickly.
Fees vs Impermanent Loss: The Counterpoint
Impermanent loss does not automatically make liquidity provision a bad trade. Every swap through the pool pays a fee (for example 0.3% on Uniswap v2 pools, and 0.01%, 0.05%, 0.3% or 1% tiers on Uniswap v3), and that fee goes to LPs. Your real result is:
Net LP return = trading fees earned + any incentive rewards − impermanent loss − gas costs
A busy pool with modest price movement can earn fees that comfortably exceed IL. A quiet pool with a strong price trend usually cannot.
The evidence is mixed, and that is the honest answer. In their 2021 study "Impermanent Loss in Uniswap v3" (arXiv:2111.09192), Loesch and co-authors analyzed 17 large Uniswap v3 pools covering about 43% of the protocol's TVL. They found LPs earned $199.3 million in fees but suffered $260.1 million in impermanent loss over the period studied, meaning those LPs would have been about $60.8 million better off simply holding. That result covers a specific period and set of pools, so it does not prove every pool loses money, but it is a strong reminder that fees do not reliably cover IL.
How Concentrated Liquidity Changes the Risk
Uniswap v3, launched in May 2021, introduced concentrated liquidity. Instead of spreading your capital across every price from zero to infinity, you choose a price range, for example ETH between $1,800 and $2,400. According to Uniswap, this can give LPs up to 4,000x capital efficiency relative to Uniswap v2.
The trade-off works in both directions:
- More fees: because your capital is concentrated where trading happens, you earn a larger share of fees per dollar deposited.
- More impermanent loss: the same concentration acts like leverage on the IL curve. A price move within your range costs you more than it would in a full-range v2 position of the same size.
- Out-of-range risk: if the price leaves your range, your position turns entirely into the weaker token and stops earning fees until you rebalance, which costs gas and can lock in the loss.
The Loesch et al. paper describes this as "leveraged liquidity provision": higher fees, but also higher risk. Concentrated liquidity rewards active, informed LPs and punishes passive ones who set a narrow range and walk away.
How to Reduce Impermanent Loss
1. Use stablecoin or correlated pairs
Pairs like USDC/USDT or ETH/stETH move closely together, so the price ratio rarely changes much and IL stays small. The trade-off is lower fees and a different risk profile: a stablecoin depeg can still create a large loss. Our guide on where stablecoin yield comes from and what can go wrong covers those risks in more detail.
2. Choose wider ranges on concentrated liquidity
On Uniswap v3 or similar DEXs, a wider range earns fewer fees per dollar but behaves more like a v2 position, with lower IL leverage and less out-of-range risk. Narrow ranges only make sense if you monitor and rebalance actively.
3. Use weighted pools
Pools with uneven weights, such as an 80/20 split, keep more of your exposure in the token you want to hold, which reduces IL compared with a 50/50 pool for the same price move.
4. Consider impermanent loss protection, with caution
Some protocols have offered IL protection, where the protocol compensates LPs for losses after a minimum holding period. Bancor v2.1 and THORChain are the best-known examples. Both paid compensation partly in their own native tokens, and both paused or ended the feature under market stress: Bancor paused its IL protection in June 2022, and THORChain later phased out its program. Treat any IL protection as a promise backed by a protocol's treasury and token price, not as a guarantee.
5. Do the math before you deposit
Before adding liquidity, estimate the fee APR from recent volume and pool size, then use the table above to see how much price movement would wipe out those fees. Tools like DEX Screener help you check volume, liquidity depth and price history; see our tutorial on using DEX Screener to track tokens and liquidity.
Impermanent Loss and New Tokens From Launchpads
Many investors first meet impermanent loss right after a token sale, when a new token lists on a DEX and early pools advertise very high APRs. Those APRs are often high precisely because the risk is high: low liquidity, large price swings and heavy selling from early allocations.
Before you provide liquidity to any new token, do your own research on the project, its tokenomics and its vesting schedule, and check how deep the pool is. If you prefer to gain exposure to early-stage projects through a structured allocation instead of an LP position, the Kommunitas launchpad lists upcoming IDO and IKO projects along with their sale terms, so you can review the details first. Neither path removes market risk, and nothing in this article is financial advice.
Frequently Asked Questions
What is impermanent loss in simple terms?
Impermanent loss is the value you give up by putting two tokens in an AMM liquidity pool instead of holding them, caused by the pool rebalancing your tokens as their price ratio changes.
How do you calculate impermanent loss?
For a 50/50 constant product pool, use IL = 2 × √r ÷ (1 + r) − 1, where r is the new price ratio divided by the starting ratio. A 2x price move gives about −5.72%, a 5x move about −25.46%.
Is impermanent loss permanent?
It becomes permanent when you withdraw while the price ratio is different from your entry. If the ratio returns to where it was when you deposited, the loss disappears.
Can trading fees cover impermanent loss?
Sometimes. High-volume pools with stable prices can earn fees that exceed IL, but a 2021 study of 17 large Uniswap v3 pools found total IL ($260.1 million) exceeded total fees ($199.3 million).
Do stablecoin pairs have impermanent loss?
Very little, as long as both stablecoins hold their peg. If one stablecoin depegs, the pool fills up with the weaker coin and the loss can be large.
Does Uniswap v3 reduce impermanent loss?
No. Concentrated liquidity increases fee income per dollar, but it also magnifies impermanent loss within the chosen range and adds the risk of the price leaving your range.