How to Calculate Impermanent Loss

Impermanent loss (IL) is the silent killer of liquidity provider returns. You deposit two tokens into an AMM pool, the price moves, and when you withdraw you find you have less total value than if you'd just held the tokens in your wallet. The loss is "impermanent" only in the sense that it disappears if prices return exactly to your entry ratio — which often doesn't happen.

This guide walks through the math so you can calculate IL for any pool, compare it against fee earnings, and decide whether providing liquidity makes sense for your situation. We'll cover the standard 50/50 formula, weighted pools, concentrated liquidity, and stablecoin pairs — plus the worked examples that make the abstract math click.

Quick Answer / TL;DR

For a standard 50/50 constant-product pool (Uniswap V2 style), impermanent loss as a function of price ratio change r is:

IL = (2 × √r / (1 + r)) − 1

Where r = P_new / P_old for the volatile asset (assuming the other side is a stable reference).

Plug in a 2× price move and you get about −5.7% IL. A 4× move gives −20%. A 10× move gives −42.6%. IL is symmetric for moves down: a 0.5× move (50% price drop) gives the same −5.7%.

To know if LPing is profitable, compare cumulative fees earned plus any liquidity-mining rewards against the IL. If fees ≥ IL, you're ahead of just holding. If fees < IL, you'd have been better off in your wallet.

This is not financial advice. AMM dynamics, fee tiers, and risks vary by protocol — read each pool's documentation before depositing.

🧮 Try it: Impermanent Loss Calculator

What Impermanent Loss Actually Is

When you deposit into a constant-product AMM, the protocol enforces x × y = k (where x and y are the two token quantities and k is a constant). Arbitrageurs rebalance the pool whenever the external market price differs from the pool's implied price.

The result: as the price of one asset moves relative to the other, the pool sells you out of the appreciating asset and buys more of the depreciating one. Your final mix is always worse than if you'd held the original deposit unchanged. The gap between LP value and HODL value is the impermanent loss.

It's called "impermanent" because if prices return to your entry ratio, the loss disappears entirely. In practice, prices rarely return to exact entry levels over long periods, so most IL is realized when you withdraw.

For a deeper conceptual walkthrough, see Impermanent Loss: Why It Matters for Liquidity Providers.

Step 1: Define Your Variables

To calculate IL you need:

• P_old: the price of asset A in terms of asset B (or USD) at the moment you deposited
• P_new: the price at the moment you're evaluating (now, or at withdrawal)
• Initial deposit values: quantities of both tokens, or just the total USD value at entry
• Fees earned: cumulative trading fees paid out by the pool during your hold

Most protocols display your fees-earned figure directly. Some require querying the position contract or using a third-party tracker.

Step 2: Compute the Price Ratio

The IL formula uses the ratio of new to old price:

r = P_new / P_old

If ETH went from $2,000 to $4,000 during your hold, r = 2.0. If ETH dropped from $2,000 to $1,000, r = 0.5. IL is symmetric, so both moves produce the same loss percentage.

For pools with two volatile assets (e.g., ETH/BTC), use the ratio of the two asset prices, not each asset's USD price. If ETH/BTC went from 0.05 to 0.075, r = 1.5 regardless of what each did in USD.

Step 3: Apply the Standard Formula (50/50 Pool)

For a Uniswap V2-style 50/50 weighted pool:

IL = (2 × √r / (1 + r)) − 1

Worked examples:

| Price ratio (r) | IL % | |---|---| | 1.25 | −0.6% | | 1.5 | −2.0% | | 2.0 | −5.7% | | 3.0 | −13.4% | | 4.0 | −20.0% | | 5.0 | −25.5% | | 10.0 | −42.6% |

For example, with r = 2: (2 × √2 / 3) − 1 = (2 × 1.4142 / 3) − 1 = 2.8284/3 − 1 ≈ −0.0572 → about −5.7%.

That means if you deposited $10,000 worth of liquidity and the price doubled, your LP position is worth ~$13,420 versus ~$14,240 if you'd held — an ~$820 shortfall before fees.

Step 4: Adjust for Weighted Pools (Balancer Style)

Not all pools are 50/50. Balancer and similar protocols allow custom weights (e.g., 80/20). The formula generalizes to:

IL = [r^w / (w + (1−w) × r)] − 1

Where w is the weight of the volatile asset (e.g., 0.8 for an 80/20 pool, 0.5 for standard).

The key takeaway: heavier weights on a single asset reduce IL when that asset moves, because the pool is forced to sell less of it. An 80/20 ETH/USDC pool on a 4× ETH move has dramatically less IL than a 50/50 pool with the same move.

Step 5: Account for Concentrated Liquidity (Uniswap V3)

Uniswap V3 lets you provide liquidity inside a specific price range, which multiplies your fee earnings — but also multiplies your IL when the price moves within (or outside) that range.

The math is more complex, but the rule of thumb:

• Narrower range → more fees per dollar, more IL per unit of price move
• Wider range → fewer fees per dollar, IL closer to V2 behavior
• If price exits your range, you're fully in one asset and accrue no further fees (but no further IL inside the original range either)

Concentrated liquidity IL can be 2–10× higher than V2 for the same price move, which is why active management or out-of-range exits are critical.

🧮 Try it: Liquidity Pool ROI Calculator

Step 6: Stablecoin and Like-Asset Pools

Stable-to-stable pools (USDC/USDT, DAI/USDC) have negligible IL when both pegs hold. The whole point of curve-style invariants is to keep IL near zero for assets that should trade close to 1:1.

The risk shifts to depeg events. USDC briefly traded at $0.87 during the SVB scare in March 2023. A stable-stable LP during a depeg can face real losses if one side drops materially. Calculate IL the same way using the ratio of actual market prices, but expect ratios very close to 1.0 (and very small IL) most of the time.

Like-asset pools (stETH/ETH, wBTC/BTC) follow the same pattern — small IL when the peg holds, larger IL during dislocations.

Step 7: Compare IL to Fees Earned

IL alone doesn't tell you if LPing was a bad decision. The full picture:

LP P&L vs HODL = Fees Earned + Liquidity Mining Rewards − IL − Gas Costs

If a pool generates 25% APR in fees over a year and IL ends up at −5.7%, you're up roughly 19.3% versus holding. If fees were only 3% APR over the same period with the same IL, you'd have been better off holding.

Most pool analytics dashboards show fees as APR or APY, but they assume current fee velocity. Realized fees are highly variable — high-volume periods earn far more than quiet ones.

Step 8: Track Over Time, Not Just at Withdrawal

IL changes continuously as the price moves. Many LPs check their position only at withdrawal and are shocked. Better practice:

1. At deposit: record the pool entry price ratio and your dollar value
2. Weekly: re-check the current price ratio, compute IL, compare to fees earned
3. Set rules: e.g., exit if cumulative IL exceeds cumulative fees by more than 2% for two consecutive checks

Dashboards like APY.vision, DeBank, or Zerion compute this automatically.

Common Mistakes and Tips

Mistake 1: Confusing IL with absolute loss. IL is loss versus HODLing. If both your tokens went up 100% but you have a −5.7% IL, your LP position is still up significantly in USD — just less than holding would have been.

Mistake 2: Ignoring gas on small positions. Depositing $500 and paying $80 in gas roundtrip eats most of any plausible profit. LP economics improve dramatically above a few thousand dollars.

Mistake 3: Assuming high APR means high profit. Advertised APRs assume current fees and volume continue, and exclude IL. Real returns can be 50% lower or worse once you account for both.

Mistake 4: Choosing pools with one volatile and one stable token expecting low IL. This is the worst-case configuration — the volatile asset will move while the stable doesn't, guaranteeing IL during any price action.

Mistake 5: Using V3 concentrated liquidity passively. V3 demands active range management or you'll spend long periods earning no fees while still bearing IL on the price exit.

Tip: For lower IL exposure, prefer pools where both assets are highly correlated (stETH/ETH, stables, BTC variants) or weighted pools that overweight the asset you want to hold anyway.

Tip: Use a forecast-based IL calculator to stress-test scenarios before depositing. "What if ETH 2x?" "What if ETH halves?" should both be answered before you click confirm.

FAQ

Q: Can impermanent loss become permanent?

Yes — the moment you withdraw, any unrealized IL is locked in. It's also effectively permanent if the price never returns to your entry ratio, which over long time horizons is the norm rather than the exception.

Q: Do trading fees always offset IL?

No. In low-volume pools, fees can be far below IL. In high-volume pools (especially during volatile periods), fees often exceed IL. The deciding factor is the pool's fee-to-volume ratio, your concentrated range (V3), and how much the price moves during your hold.

Q: Is IL the same for stablecoin pairs?

Stable-to-stable pools have very small IL when both pegs hold. The math still applies — it's just that price ratios stay very close to 1.0. The real risk is depeg events, where one stable can lose its $1 anchor temporarily or permanently.

Q: How do I avoid impermanent loss entirely?

Don't provide liquidity. Single-sided staking, lending, or simply holding eliminates IL but also forgoes pool fees. Some newer protocols (e.g., Bancor v3 historically) attempted IL protection but with mixed results — read the fine print on any "IL-free" claim.

Q: Does impermanent loss matter for taxes?

US tax treatment of LP positions is unsettled. Depositing into and withdrawing from an LP can be a taxable event, and IL itself isn't a deductible loss until realized. This is not tax advice — consult a crypto-specialized accountant. See Crypto Tax Reporting in the US for background.

Conclusion

Impermanent loss is just math: the gap between what your LP position is worth and what holding the same tokens would have been worth. The standard formula handles most cases, weighted-pool and concentrated-liquidity formulas handle the rest, and the deciding question is always whether fees earned exceed the IL incurred. Calculate before you deposit, track during the hold, and rebalance or exit when the numbers turn against you.

Run a few scenarios — different price moves, different fee assumptions, different time horizons — before committing serious capital to any pool.

🧮 Try it: Impermanent Loss Calculator

Last updated: December 2026