Published July 8, 2026 · by ILCalc
Impermanent loss is the gap between what you would have earned by simply holding two tokens and what you actually end up with after depositing them into a liquidity pool. It is the single most misunderstood risk in DeFi — and once the intuition clicks, it stops being scary and starts being something you can price. This guide walks through the idea in plain English, with one clean worked example, why it happens under the hood, and when it actually matters versus when it barely registers.
When you provide liquidity to an automated market maker (AMM) like Uniswap, you deposit a pair of assets — say ETH and USDC. If their relative price moves, the pool automatically rebalances your holdings, and you come out with less value than if you had just kept the two tokens in your wallet. That shortfall is impermanent loss. It is called "impermanent" because if prices return exactly to where you started, the loss disappears. If prices never come back, it becomes very permanent the moment you withdraw.
IL = HODL value − LP value. It is always zero or negative relative to holding — the pool can never beat a simple hold on price alone. Fees are what make LPing worthwhile despite this.Suppose you deposit $5,000 of ETH and $5,000 of USDC into a 50/50 pool — $10,000 total, with ETH at $2,000. Now ETH doubles to $4,000. That is a 2× move.
If you had just held your original 2.5 ETH and 5,000 USDC, you would now have $10,000 in ETH plus $5,000 in USDC = $15,000. But the pool kept rebalancing as ETH rose — quietly selling some of your ETH for USDC on the way up. When you withdraw, your position is worth about $14,142. The difference, roughly $858, is your impermanent loss.
That $858 is exactly 5.7% of the $15,000 you would have by holding — the reference figure for a 2× move. Note that a 2× up and a 2× down (a −50% drop) produce the same IL percentage. Impermanent loss cares only about the size of the divergence, not the direction.
An AMM does not know or care what the "real" price of ETH is. It just holds a reserve of each token and keeps their product constant (the famous x · y = k rule). When ETH rises on outside exchanges, arbitrage traders buy the now-cheap ETH out of the pool until its pool price matches the market. Every one of those trades hands the pool more USDC and takes away ETH.
The net effect: the pool is a machine that automatically sells the asset that is going up and buys the asset that is going down. That is the opposite of what you would want if you were just trying to ride a winner. You end up underweight the outperformer exactly when it mattered most. If you want the full step-by-step derivation of the numbers, see our impermanent loss formula breakdown.
Impermanent loss grows with the size of the price divergence, but not linearly — it accelerates. Small moves cost almost nothing; large moves start to bite. Here is the reference table (the same figures apply whether the price multiplies up or divides down):
| Price move | Factor | Impermanent loss |
|---|---|---|
| +25% or −20% | 1.25× | ≈ 0.6% |
| +50% or −33% | 1.5× | ≈ 2.0% |
| +100% or −50% | 2× | ≈ 5.7% |
| +200% or −67% | 3× | ≈ 13.4% |
| +300% or −75% | 4× | ≈ 20.0% |
| +400% or −80% | 5× | ≈ 25.5% |
The pattern to internalize: a modest 25% move costs about half a percent — noise, easily covered by fees. But a 4× move wipes out a fifth of your value versus holding. This is why the pair you choose matters enormously.
If both assets are meant to track the same value — USDC/USDT, or two liquid-staking derivatives of ETH — the price factor stays glued near k = 1, and IL is essentially zero. It grows quadratically from there, so it stays tiny for a long time: even a 10% depeg (k = 0.90) is only about 0.14%. These pools are the low-risk end of the spectrum, and their fee income usually swamps the trivial IL.
Pair a memecoin against ETH and a 3× or 4× move — routine in that world — hands you 13% to 20% IL. Worse, Uniswap V3-style concentrated liquidity amplifies IL by roughly 2–4× for typical ranges, and far more for very tight ranges, because you are concentrating your exposure into a narrow price band. And once the price exits your chosen range, your position converts to 100% of the losing asset and stops earning fees entirely — the worst of both worlds.
Yes — that is the whole point of the fees. As an LP you collect a cut of every swap. Your real profit is net = fees − IL$. The break-even fee APR you need is simply your IL percentage divided by the fraction of a year you are exposed: break-even fee APR = IL% ÷ (days/365). If a pair drifts enough to cost you 5.7% over a year, you need a 5.7% fee APR just to tie holding. We dig into whether real-world fee income actually clears that bar in impermanent loss vs trading fees.
If you would rather earn yield without this dynamic at all, staking is the usual alternative: it pays a steadier return with no impermanent loss — typically low single digits for ETH, higher on some chains — but it ties up a single asset and carries its own risks like lockups and slashing. There is no free lunch; there are just different trades. Our guide on how to avoid impermanent loss covers the practical levers: correlated pairs, wider ranges, and fee-rich pools.
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It is real the moment you withdraw. While your funds are in the pool and prices are still moving, the loss is "on paper" and can shrink if prices revert. But if the price has permanently diverged, you lock in the loss when you exit — so treating it as real from the start is the safer mindset.
Only by not providing liquidity, or by using pairs that never diverge. Stablecoin and same-asset pools get you close to zero IL. For volatile pairs, you can reduce but never eliminate it — the risk is baked into how AMMs work. See how to avoid impermanent loss for the practical playbook.
Because the loss depends on the current price gap between deposit and now. If the two assets return to their original relative price, the gap — and the loss — vanishes. It only becomes permanent when you withdraw while prices are still diverged.