Impermanent Loss Calculator
Calculate the impermanent loss (IL) you may experience when providing liquidity to decentralized exchange (DEX) pools. This calculator shows how price divergence affects your LP position compared to simply holding the tokens, and helps you analyze whether trading fees compensate for IL.
Understanding Impermanent Loss: A Complete Guide
Impermanent loss (IL) is one of the most important—yet frequently misunderstood—concepts in decentralized finance (DeFi). It represents the opportunity cost of providing liquidity to an automated market maker (AMM) compared to simply holding the underlying tokens. This comprehensive guide will demystify IL, show you how to calculate it, and help you make informed decisions about liquidity provision.
What Is Impermanent Loss?
When you deposit tokens into a liquidity pool, the AMM algorithm rebalances your position as prices change. If Token A's price increases relative to Token B, the pool automatically sells some of Token A for Token B to maintain the target ratio. This means you end up with:
- Fewer units of the appreciating token (Token A)
- More units of the depreciating token (Token B)
- A total value that is less than if you had simply held both tokens
The term "impermanent" reflects that the loss is only realized when you withdraw. If prices return to the original ratio, the loss disappears—hence it's "impermanent" rather than "permanent."
The Mathematics of Impermanent Loss
For a standard 50/50 liquidity pool (like Uniswap v2 or SushiSwap), impermanent loss depends solely on the price ratio change. The formula is:
Where r is the price ratio change:
This formula reveals a crucial insight: impermanent loss depends on how much prices diverge, regardless of direction. A 2× increase causes the same IL as a 50% decrease (both represent a 2:1 ratio change).
Impermanent Loss Reference Table (50/50 Pool)
| Price Change | IL (%) | Value vs HODL | Example (on $10,000) |
|---|---|---|---|
| 1.25× (25% up) | 0.62% | 99.38% | -$62 relative to holding |
| 1.50× (50% up) | 2.02% | 97.98% | -$202 relative to holding |
| 2× (100% up) | 5.72% | 94.28% | -$572 relative to holding |
| 3× (200% up) | 13.40% | 86.60% | -$1,340 relative to holding |
| 4× (300% up) | 20.00% | 80.00% | -$2,000 relative to holding |
| 5× (400% up) | 25.46% | 74.54% | -$2,546 relative to holding |
| 0.50× (50% down) | 5.72% | 94.28% | -$572 relative to holding |
| 0.25× (75% down) | 20.00% | 80.00% | -$2,000 relative to holding |
Weighted Pools and Impermanent Loss
Platforms like Balancer allow pools with non-equal weights (e.g., 80/20 or 95/5). The generalized IL formula for weighted pools is:
Where wA and wB are the pool weights (e.g., 0.80 and 0.20 for an 80/20 pool).
Higher weight on an asset reduces IL exposure to that asset's price changes:
| Pool Weights | IL at 2× Price Change | IL at 5× Price Change |
|---|---|---|
| 50/50 | 5.72% | 25.46% |
| 80/20 | 1.59% | 9.16% |
| 95/5 | 0.35% | 2.16% |
The Role of Trading Fees
Liquidity providers earn trading fees every time someone swaps through the pool. These fees can offset or even exceed impermanent loss, making liquidity provision profitable despite IL. The net position is:
Common fee tiers across AMMs:
| Platform | Fee Tiers | Best For |
|---|---|---|
| Uniswap v2 | 0.30% | All pairs |
| Uniswap v3 | 0.01%, 0.05%, 0.30%, 1.00% | Stables, majors, exotics |
| Curve | 0.04% | Stablecoin pools |
| Balancer | Customizable | Weighted pools |
| PancakeSwap | 0.25% | BSC pairs |
When Does Impermanent Loss Become Permanent?
IL crystallizes into actual loss in these scenarios:
- Withdrawal at divergent prices: If you exit when prices differ from entry, IL becomes real loss
- Token goes to zero: In extreme cases (rug pulls), IL can approach 100%
- Prices never revert: If the new price ratio becomes the "new normal," the loss is effectively permanent
Concentrated Liquidity: Uniswap v3
Uniswap v3 introduced concentrated liquidity, where LPs can specify a price range for their capital. This increases capital efficiency but also amplifies impermanent loss:
Key considerations for v3 positions:
- Tighter ranges = higher fee APR but higher IL
- Positions go "out of range" when prices exceed bounds
- Active management required to rebalance ranges
- Gas costs can eat into profits on smaller positions
Strategies to Mitigate Impermanent Loss
1. Choose Correlated Pairs
Pairs that tend to move together experience minimal IL:
- Stablecoin-stablecoin: USDC/DAI, USDT/USDC
- Wrapped pairs: ETH/stETH, ETH/wETH
- Pegged assets: renBTC/WBTC
2. Use Higher-Weight Pools
If you're bullish on one asset, use an 80/20 or 95/5 pool to maintain more exposure while still earning fees.
3. Select High-Volume Pools
Pools with high trading volume generate more fees to compensate for IL. Look for pools with:
- Consistent daily volume relative to TVL
- High fee tier appropriate for the pair volatility
- Sustainable yield (not just temporary incentives)
4. Time Your Entry
Enter pools when you believe prices are relatively stable or after major volatility events when a return to mean is likely.
5. Consider IL Protection
Some protocols offer IL insurance or protection mechanisms:
- Bancor: Single-sided liquidity with IL protection
- Thorchain: Native IL protection after vesting
- Options protocols: Hedge with put options
Calculating Break-Even APR
To profit from liquidity provision, your fee income must exceed IL. The break-even APR formula is:
For example, if you expect 5.72% IL over 6 months, you need at least 11.44% APR to break even.
Real-World Example: ETH/USDC Pool
Let's walk through a complete example:
Scenario: You deposit $10,000 into an ETH/USDC pool when ETH = $2,000
- Initial holdings: 2.5 ETH + 5,000 USDC
- Pool APR: 20%
- Time in pool: 180 days
ETH rises to $3,000 (1.5× increase):
- IL = 2.02%
- HODL value = 2.5 × $3,000 + $5,000 = $12,500
- LP value ≈ $12,500 × (1 - 0.0202) = $12,247.50
- Fee income (6 months at 20% APR) = $10,000 × 0.10 = $1,000
- Total LP value = $12,247.50 + $1,000 = $13,247.50
- Net gain vs HODL = $13,247.50 - $12,500 = +$747.50
Despite impermanent loss, the LP position outperforms due to fee income!
IL in Different Market Conditions
| Market Condition | IL Impact | Strategy |
|---|---|---|
| Sideways/Ranging | Low IL, high fee collection | Ideal for LPing |
| Strong Uptrend | Significant IL vs holding | Consider 80/20 pools or exit |
| Strong Downtrend | IL + capital depreciation | Stablecoin pools safer |
| High Volatility | High IL but high fees | Net depends on fee volume |
Common Misconceptions
Myth 1: "I only lose if I withdraw"
While technically true that IL is unrealized, if prices permanently diverge, the loss is effectively real. The "impermanent" label can be misleading.
Myth 2: "IL only matters in bear markets"
IL occurs in both directions. A 3× pump creates the same IL (13.4%) as a 66% drop. Bull markets can cause substantial IL.
Myth 3: "Higher APR always compensates"
High APRs often come from tokens that may depreciate (farm tokens, governance tokens). Always consider the source of yield.
Frequently Asked Questions
Can impermanent loss exceed 100%?
No, IL is bounded. Even if one token goes to zero, you'd lose at most 100% of your position (same as holding). In practice, maximum IL approaches ~100% only in extreme scenarios.
Does IL apply to Curve stablecoin pools?
Technically yes, but it's minimal because stablecoins maintain near-parity. A 1% depeg might cause 0.01% IL. The bigger risk is one stablecoin losing its peg entirely.
How do liquidity mining rewards affect the math?
Add token rewards to your fee income when calculating net returns. Be cautious—many reward tokens depreciate, so APY can be misleading.
Is single-sided staking better?
Single-sided liquidity (like on Bancor) eliminates direct IL exposure but introduces other risks like counterparty risk and potentially lower yields.
How often should I rebalance?
For v3 concentrated positions, rebalance when positions go significantly out of range. Consider gas costs—frequent rebalancing can erode profits on smaller positions.
Tools for IL Monitoring
- DeBank: Portfolio tracking with IL display
- Zapper: LP position analytics
- APY.vision: Dedicated IL tracking
- Revert.finance: Uniswap v3 position analytics
Key Takeaways
- Impermanent loss is the opportunity cost vs. holding, not an absolute loss
- IL depends on price ratio change, not direction (up vs. down)
- Trading fees can offset IL—calculate break-even APR
- Weighted pools reduce IL exposure to the higher-weighted asset
- Concentrated liquidity amplifies both fees AND IL
- Correlated pairs minimize IL (stablecoins, pegged assets)
- Always consider IL when evaluating LP opportunities
Understanding impermanent loss is essential for successful DeFi participation. Use this calculator to model different scenarios before committing capital, and always factor in IL when comparing LP yields to simple holding strategies.