Glossary · DeFi
What is Impermanent loss?
The opportunity cost of providing liquidity vs simply holding the underlying tokens. When the pair's prices diverge, the AMM rebalances against you and the LP returns less than buy-and-hold.
Last updated April 30, 2026
How it works
When you provide liquidity to a constant-product AMM (Uniswap V2 style), the pool's automated rebalancing means you always end up holding more of whatever asset has dropped relative to its pair, and less of whichever has risen. This is the AMM doing its job — but it means LPs underperform buy-and-hold whenever prices diverge from the entry ratio.
The math is exact. If one asset doubles relative to its pair, you experience ~5.7% impermanent loss vs holding. Triple = ~13.4%. 5× = 25.5%. 10× = 50%. The loss is "impermanent" only in the sense that it disappears if prices revert — most of the time they don't.
| Price ratio change | IL vs holding |
|---|---|
| 1.25× | 0.6% |
| 1.5× | 2.0% |
| 2× | 5.7% |
| 3× | 13.4% |
| 5× | 25.5% |
| 10× | 50% |
The numbers are symmetric — same loss whether the volatile asset doubles or halves.
Example
You LP $1,000 of USDC and $1,000 of ETH (0.3 ETH at $3,333) into a Uniswap V2 USDC/ETH pool. Six months later:
- ETH has gone to $6,666 (2× price ratio)
- IL = 5.7%
- Pool position now worth $1,886 (vs $2,000 original USD value, but ETH appreciated so it's not loss in absolute terms)
- Hold scenario: $1,000 USDC + 0.3 ETH × $6,666 = $3,000
You're up 88% on the LP, but you'd have been up 100% just holding. The 12% gap is IL plus opportunity cost. If swap fees earned more than 12% over those six months, LPing was profitable; if not, holding was better.
For perspective: a Uniswap ETH/USDC pool typically earns 5-15% APY in fees during normal markets. ETH doing a 2× in six months is very common. Many LP positions look bad on a pure fee-vs-IL basis.
Why it matters
IL is the single most-misunderstood DeFi concept. Common patterns to avoid:
- Chasing displayed APY without modeling IL. "20% APY" on a volatile pair often nets to negative real return.
- Assuming the loss is recoverable. "Impermanent" suggests the loss might reverse, but in practice prices don't come back — by the time you exit, IL is realized.
- LPing memecoins. A pair where one side regularly does 5×/0.5× swings will drain LPs even with 100%+ fee APY.
Where LPing tends to work:
- Stable pairs (USDC/USDT, sUSDe/USDC) — IL is near-zero because both assets target the same value.
- Correlated pairs (stETH/ETH, frxETH/ETH) — same upside/downside, minimal divergence.
- Concentrated liquidity in tight ranges for active managers who rebalance.
- Bear-market sideways markets when fees accumulate without much price movement.
If you're not sure whether a pool is right for you, the test: would you be happy holding the pair 50/50 even if you earned no fees? If yes, LPing only adds upside (the fees). If no, the IL math will probably bite.