Impermanent Loss

Decentralized Finance (DeFi)
Updated Apr 2026 • Has calculator

The percentage value lost by a liquidity provider compared to simply holding the tokens, due to price divergence between the two pooled assets.

What is Impermanent Loss?

Impermanent loss occurs when the price of tokens deposited into an automated market maker (AMM) liquidity pool diverges from their price at the time of deposit. Because AMMs like Uniswap v2 use a constant-product formula (x × y = k), the pool automatically rebalances as prices move, leaving liquidity providers with fewer of the appreciating token and more of the depreciating one. The loss is 'impermanent' because it reverses if prices return to the original ratio — but if liquidity is withdrawn while prices diverge, the loss is realized. Trading fees earned by the pool may partially or fully offset impermanent loss depending on volume.

Formula

IL (%) = (2 × √pr / (1 + pr) − 1) × 100

Worked Example

Worked example — Uniswap v2 — ETH/USDC Pool

ETH price doubles from $1,500 to $3,000

Step 1  Deposit: 1 ETH ($1,500) + 1,500 USDC at ETH = $1,500
Step 2  Price ratio: $3,000 / $1,500 = 2.0×
Step 3  IL = 2 × √2 / (1 + 2) − 1 = 2 × 1.4142 / 3 − 1 = −5.72%
Step 4  HODL value: $4,500 | LP value: $4,243 | Difference: −$257
Step 5  → LP earns trading fees that may offset this −5.72% drag

Source: Uniswap v2 Core Whitepaper (2020-03-23)

Calculate Impermanent Loss

New price divided by price at deposit. E.g. 2.0 = doubled, 0.5 = halved, 1.0 = unchanged.

Impermanent Loss

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Not investment advice.

How to Interpret Impermanent Loss

< -30
Severe IL — price moved 9× or more; fees rarely compensate
-30 – -10
Significant IL — price moved 4×+ from deposit price
-10 – -2
Moderate IL — price moved ~2–4× from deposit price
> -2
Minimal IL — small price divergence; fees likely offset it

📚 DeFi Basics — Complete the path

  1. APR to APY
  2. APY to APR
  3. Effective Annual Rate
  4. DeFi APY
  5. Impermanent Loss
Sources
  1. Uniswap v2 Core Whitepaper
  2. Investopedia — Impermanent Loss