Definition
Impermanent Loss (IL) — the difference between holding assets in a wallet versus placing them in a liquidity pool. Occurs when the price of one asset in the pair changes significantly relative to the other.
How Impermanent Loss Occurs
Example
You added to a pool:
- 1 ETH ($2,000)
- 2,000 USDC
Total value: $4,000
Start:
1 ETH = $2,000
Pool: 1 ETH + 2,000 USDC = $4,000
One month later, ETH rises to $4,000:
If you just held:
1 ETH ($4,000) + 2,000 USDC = $6,000
In pool (due to rebalancing):
0.707 ETH + 2,828 USDC ≈ $5,656
Impermanent Loss: $344 (5.7%)
Why This Happens
Liquidity pools (AMM) maintain a constant value ratio between assets. When price changes:
- Arbitrageurs equalize prices with market
- Pool automatically rebalances
- You receive less of the appreciating asset
- And more of the depreciating one
Impermanent Loss Table
| Price Change | Impermanent Loss |
|---|---|
| 1.25x (+25%) | 0.6% |
| 1.5x (+50%) | 2.0% |
| 2x (+100%) | 5.7% |
| 3x (+200%) | 13.4% |
| 4x (+300%) | 20.0% |
| 5x (+400%) | 25.5% |
When Losses Become Permanent
Losses are called "impermanent" because:
- If prices return to original levels — losses disappear
- If you exit the pool at changed prices — losses become realized
How to Minimize Impermanent Loss
1. Choose Stable Pairs
Stablecoin pools (USDC/USDT) have almost no IL.
2. Correlated Assets
Pairs like ETH/stETH or WBTC/renBTC minimize IL.
3. Consider Fees
High fees can offset IL:
Fees per year: +20%
Impermanent loss: -5%
Net result: +15%
4. Concentrated Liquidity
On Uniswap V3 you can set a price range:
- Higher fees within range
- But higher risks outside range
Impermanent Loss and DCA
For investors using DCA:
| Strategy | Recommendation |
|---|---|
| Pure DCA | Avoid liquidity pools |
| DCA + yield | Stablecoin pools only |
| Experienced investor | Analyze IL vs fees |
Important: For most investors, simply holding assets or regular staking is safer than providing liquidity.
Profitability Calculation
Before entering a pool, calculate:
Expected fees per year: X%
Potential IL (with price movement): Y%
If X > Y → pool may be profitable
If X < Y → better to just hold assets
