Impermanent Loss Calculator

Calculate impermanent loss for AMM liquidity pool positions. Understand how token price changes affect your LP position and whether trading fees compensate for the loss.

Impermanent Loss Calculator

Calculate IL based on price change of one token relative to the other.

Initial LP Position Value

Token A Price Change (%)

Token B Price Change (%)

Trading Fees Earned (%)

IL at Different Price Levels

See impermanent loss across a range of price scenarios.

LP Position Size

Pool Type

Fee APY Needed to Offset IL

Calculate the minimum fee APY required to make LP profitable vs holding.

Expected Price Volatility

Hold Period

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Impermanent Loss Formula

IL = 2 x sqrt(price_ratio) / (1 + price_ratio) - 1

Where price_ratio = new_price / original_price

IL at 2x price change = -5.7%, at 5x = -25.5%

Frequently Asked Questions

What is impermanent loss?

Impermanent loss (IL) occurs when the price ratio of tokens in a liquidity pool changes after you deposit. The loss represents the difference between holding the tokens in your wallet versus providing liquidity. It is called "impermanent" because the loss reverses if prices return to the original ratio. However, if you withdraw at a different ratio, the loss becomes permanent.

How much impermanent loss can I expect?

IL depends on how much prices diverge. A 2x price change results in ~5.7% IL, a 3x change ~13.4%, and a 5x change ~25.5%. For stablecoin pairs with minimal price divergence, IL is typically under 0.1%. Volatile pairs like ETH/BTC can experience 3-10% IL in normal market conditions.

Do trading fees offset impermanent loss?

Trading fees can offset IL if the pool generates sufficient volume. High-volume pools like ETH/USDC on Uniswap can generate 10-30% APY in fees, which may exceed IL in many market conditions. However, during periods of extreme price movement, IL can outpace fee accumulation. The key is selecting pools with high volume relative to liquidity.

Which pools have the lowest impermanent loss?

Stablecoin-stablecoin pools (USDC/DAI) have virtually zero IL since both tokens maintain $1 peg. Correlated pairs like stETH/ETH also experience minimal IL. For volatile assets, concentrated liquidity positions (Uniswap V3) can reduce IL by providing liquidity only within a specific price range, though they require more active management.

Is providing liquidity worth the risk?

LP is profitable when trading fees exceed impermanent loss. For high-volume pools with moderate volatility, LPing often beats holding. For highly volatile pairs or low-volume pools, the risk may not be worth the reward. Professional LPs use concentrated liquidity, active management, and hedging strategies to optimize returns while minimizing IL exposure.

Understanding Impermanent Loss in DeFi

Impermanent loss is perhaps the most misunderstood concept in decentralized finance. It occurs because automated market makers (AMMs) like Uniswap maintain a constant product formula (x * y = k) that automatically rebalances token ratios as prices change. When you provide liquidity to a pool, the AMM algorithm sells your appreciating token and buys the depreciating one to maintain balance. This means you end up with more of the losing token and less of the winning token compared to simply holding.

The mathematics of impermanent loss are well-defined: for a standard x*y=k AMM, the loss relative to holding is calculated as 2*sqrt(r)/(1+r) - 1, where r is the price ratio change. This formula reveals that IL is symmetric with respect to price increases and decreases, and grows non-linearly with larger price divergences. A 2x price change in either direction produces identical IL of approximately 5.7%, while a 5x change produces 25.5%.

Strategies to Mitigate Impermanent Loss

Sophisticated DeFi investors employ several strategies to reduce IL exposure. Concentrated liquidity on Uniswap V3 allows LPs to provide liquidity within a specific price range, earning higher fees per unit of capital while limiting exposure to extreme price movements outside their range. However, if the price moves outside the range, the position stops earning fees and effectively becomes a one-sided bet.

Another approach is to use pools with correlated assets. stETH/ETH pools experience minimal IL because both tokens track the same underlying value. Similarly, token pairs that tend to move in the same direction (BTC/ETH) experience less IL than pairs where one is volatile and the other stable (ETH/USDC). Some protocols like Balancer offer weighted pools (e.g., 80/20) that reduce IL for the majority asset.

Professional LP Management

Professional liquidity providers treat LP management as an active strategy rather than a passive one. They continuously monitor price ratios, adjust concentration ranges, and hedge IL exposure using options or perpetual futures. Some use delta-neutral strategies that combine LP positions with short positions to eliminate directional exposure while capturing trading fees. These advanced strategies require significant expertise and capital but can generate consistent yields of 15-30% APY with minimal IL risk.

For luxury investors considering LP as an income strategy, the key insight is that impermanent loss is essentially the cost of providing a service (market making) to the DeFi ecosystem. Just as traditional market makers accept inventory risk in exchange for the bid-ask spread, DeFi LPs accept impermanent loss risk in exchange for trading fees. The profitability of this activity depends on selecting the right pools, managing positions actively, and understanding the risk-reward tradeoffs involved.

Impermanent Loss Calculator