How impermanent loss works
Impermanent loss is the gap between what a liquidity position is worth and what the same two assets would have been worth if you had simply held them. It is not a fee and nothing is taken from you — it is an opportunity cost created by the way an automated market maker rebalances your deposit as prices move.
In a constant-product pool the product of the two token balances is held fixed, so any price change forces the pool to trade. Arbitrageurs buy the asset that has become cheap in the pool and sell the one that has become expensive until the pool price matches the outside market. The mechanical result is that the pool always ends up holding less of the asset that rose and more of the asset that fell.
It is called impermanent because it reverses if prices return to where they started — the gap closes completely. It becomes permanent the moment you withdraw. Fee income runs the other way and can more than cover it, which is the entire economic case for providing liquidity, but the two have to be compared explicitly rather than assumed to net out.
Worked example
Depositing 2 ETH at 2,500 plus 5,000 in stablecoins — 10,000 split evenly — into a 50/50 pool, then ETH doubles to 5,000, giving k = 2.
| Input | Value |
|---|
| Initial deposit | 10,000 (2 ETH + 5,000) |
| ETH price at withdrawal | 5,000 (k = 2) |
| Value if simply held | 15,000 |
| Value of the LP position | 14,142 |
| Impermanent loss | 5.72% (858) |
| Price change 1.25x | 0.62% loss |
| Price change 1.5x | 2.02% loss |
| Price change 2x | 5.72% loss |
| Price change 3x | 13.40% loss |
| Price change 4x | 20.00% loss |
| Price change 5x | 25.46% loss |
Two things are worth reading off this table. First, the loss is very small for modest moves and accelerates sharply beyond a doubling — which is why pools of closely correlated assets, such as two stablecoins, carry so little of it. Second, in this example the position needed roughly 858 in fees just to match holding, or about 8.58% of the amount deposited. Any pool where you expect a large divergence has to pay a lot of fees to be worth entering.
How to use this calculator
- Enter the prices of both assets at the time you deposited, not their current values.
- Enter the current or expected prices to get k, the ratio of how far they have moved apart.
- Read the loss as a percentage against holding, then convert it into currency using your deposit size.
- Compare that figure against the fees the position has actually earned — the position is only worthwhile if fees exceed the loss.
- Test a scenario where one asset triples or falls by two thirds before entering, so the downside is a decision rather than a discovery.
Frequently asked questions
Why is it called impermanent if I can lose money?
Because it is unrealised while you remain in the pool. If the price ratio returns to what it was on deposit, the gap disappears entirely. Withdrawing locks it in. The name is genuinely misleading — for a position withdrawn after a large divergence, the loss is completely permanent.
Does impermanent loss mean I lost money overall?
Not necessarily. It measures performance against holding, not against your deposit. In the example above the position is worth 14,142 on a 10,000 deposit — a substantial gain, and still 858 less than doing nothing. Both statements are true at once.
Does it matter which asset goes up?
No. The formula depends only on the ratio between the two prices, so a doubling and a halving produce an identical 5.72% loss. What matters is how far the two assets diverge, not which direction they diverge in.
How do trading fees offset it?
Every swap through the pool pays a fee that accrues to liquidity providers in proportion to their share. High volume relative to pool size means fees accumulate quickly. A position is profitable versus holding only when accumulated fees exceed the impermanent loss at the moment you withdraw.
Why do stablecoin pools have so little impermanent loss?
Because both assets track the same reference price, so k stays very close to 1 and the loss stays near zero. This is why stablecoin pools can operate on thin fees and still be worthwhile — and also why a depeg in one of the pair turns a near-zero risk into a real one very quickly.
Can I avoid impermanent loss entirely?
Only by not providing liquidity to a constant-product AMM. It is a structural consequence of the pricing curve, not a flaw to be patched. Some designs reduce exposure — concentrated liquidity ranges, single-sided pools, correlated-asset curves — but each substitutes a different risk rather than removing this one.
This calculator is an educational tool. Results are estimates based on the inputs you provide and do not constitute financial advice. Verify figures with your bank, broker or a qualified advisor before acting on them.