What Is Impermanent Loss? Complete Guide for Uniswap Liquidity Providers

Impermanent loss is the single biggest risk facing Uniswap liquidity providers—and the most misunderstood. Many LPs think they're earning great returns until they withdraw and realize their position is worth less than if they'd just held the tokens. Understanding impermanent loss is the difference between profitable LP positions and disappointing results.

This guide explains exactly what impermanent loss is, how to calculate it, and how to minimize it. You'll see real examples with specific numbers, understand when IL becomes permanent, and learn strategies to protect your returns. By the end, you'll know how to choose pairs that minimize IL risk and track your actual performance.

Whether you're considering your first LP position or optimizing an existing portfolio, understanding impermanent loss is essential for long-term success.

What Is Impermanent Loss?

Impermanent loss (IL) is the loss you experience from providing liquidity when token prices diverge from your entry point. It's called "impermanent" because if prices return to your entry point, the loss disappears. But if you withdraw during price divergence, IL becomes permanent.

Simple definition: The difference between what your tokens would be worth if you held them versus what they're worth in the liquidity pool.

Key point: Impermanent loss occurs even when both tokens increase in value. It's about the relative price change between the two tokens, not absolute price movement.

Why Does Impermanent Loss Happen?

The AMM Mechanism

Uniswap uses the constant product formula: x × y = k

What this means:

• Pool must maintain constant product of both tokens
• When one token's price increases, the pool automatically rebalances
• You end up with more of the cheaper token and less of the more expensive token
• This rebalancing creates impermanent loss

The Rebalancing Effect

Example: ETH/USDC Pool

You deposit:

• 2 ETH (worth $5,000)
• 5,000 USDC
• Total: $10,000
• Entry price: $2,500 per ETH

After ETH price doubles to $5,000:

If you held tokens:

• 2 ETH × $5,000 = $10,000
• 5,000 USDC = $5,000
• Total: $15,000

In the pool (rebalanced):

• Pool maintains constant product
• You now have: ~1.414 ETH + ~7,071 USDC
• Value: (1.414 × $5,000) + 7,071 = $7,071 + $7,071 = $14,142

Impermanent loss:

• Would have: $15,000
• Actually have: $14,142
• IL: $858 (5.72%)

Why it happened: Pool rebalanced to maintain the constant product, giving you more USDC and less ETH as ETH price increased.

How to Calculate Impermanent Loss

The Formula

Impermanent Loss % = 2 × √(price_ratio) - price_ratio - 1

Where:

• price_ratio = new_price / entry_price

Example calculation:

Entry price: $2,500 per ETH New price: $5,000 per ETH Price ratio: 5,000 / 2,500 = 2.0

IL % = 2 × √(2.0) - 2.0 - 1 IL % = 2 × 1.414 - 2.0 - 1 IL % = 2.828 - 3.0 IL % = -0.172 = -5.72%

Result: 5.72% impermanent loss (matches our example above).

Quick Reference Table

| Price Change | Impermanent Loss | |--------------|------------------| | ±10% | 0.5% | | ±25% | 2.0% | | ±50% | 5.72% | | ±100% (2x) | 5.72% | | ±200% (3x) | 13.4% | | ±300% (4x) | 20.0% | | ±900% (10x) | 25.5% |

Key insight: IL increases with price divergence, but at a decreasing rate. The maximum theoretical IL is ~25.5% (when one token goes to zero or infinity relative to the other).

Real Examples: Impermanent Loss in Practice

Example 1: Moderate Price Movement

Setup:

• Pair: ETH/USDC
• Deposit: 2 ETH + 5,000 USDC ($10,000 total)
• Entry price: $2,500 per ETH

After 30 days:

• ETH price: $3,000 (up 20%)
• You held: Would be worth $11,000
• In pool: Worth ~$10,950
• IL: $50 (0.45%)

Impact: Minimal IL, fees likely exceed loss.

Example 2: Significant Price Movement

Setup:

• Pair: ETH/USDC
• Deposit: 2 ETH + 5,000 USDC ($10,000 total)
• Entry price: $2,500 per ETH

After 30 days:

• ETH price: $5,000 (doubled)
• You held: Would be worth $15,000
• In pool: Worth ~$14,142
• IL: $858 (5.72%)

Impact: Significant IL. Need strong fees to offset.

If pool generated $1,000 in fees:

• Gross return: $1,000
• Minus IL: -$858
• Net return: $142 (1.42%)

Verdict: Fees barely covered IL. Not great returns.

Example 3: Extreme Price Movement

Setup:

• Pair: ETH/INJ (altcoin)
• Deposit: 2 ETH + 500 INJ ($10,000 total)
• Entry price: $2,500 per ETH, $10 per INJ

After 30 days:

• ETH price: $2,500 (unchanged)
• INJ price: $30 (tripled)
• You held: Would be worth $20,000
• In pool: Worth ~$17,320
• IL: $2,680 (13.4%)

Impact: Severe IL. Need exceptional fees to offset.

If pool generated $2,000 in fees:

• Gross return: $2,000
• Minus IL: -$2,680
• Net return: -$680 (-6.8%)

Verdict: Lost money despite earning fees. IL exceeded fees.

This is why tracking real returns matters—gross fees don't tell the full story. Start tracking with PoolShark to see your actual returns after accounting for impermanent loss.

When Does Impermanent Loss Become Permanent?

It's "Impermanent" Until You Withdraw

Key concept: IL is only realized (becomes permanent) when you withdraw from the pool during price divergence.

Example timeline:

Day 1: Deposit at $2,500 ETH Day 30: ETH at $5,000 (IL exists but unrealized) Day 60: ETH back to $2,500 (IL disappears) Day 90: Withdraw (no IL, prices returned)

Result: No permanent loss because you didn't withdraw during divergence.

But:

Day 1: Deposit at $2,500 ETH Day 30: ETH at $5,000 (IL exists) Day 30: Withdraw (IL becomes permanent) Day 60: ETH back to $2,500 (doesn't matter, you already withdrew)

Result: Permanent loss of $858 because you withdrew during price divergence.

The Timing Matters

Best case: Prices return to entry before you withdraw

• IL disappears
• You keep all fees earned
• No permanent loss

Worst case: Prices diverge further, then you withdraw

• IL becomes permanent
• May exceed fees earned
• Net loss

Reality: Most LPs withdraw during some price divergence, so IL often becomes permanent.

Factors That Affect Impermanent Loss

1. Price Divergence

Most important factor: How much do prices diverge?

Correlated pairs (low IL):

• ETH/WBTC: Both move together
• IL typically: 0.5-2%
• Minimal risk

Uncorrelated pairs (high IL):

• ETH/USDC: ETH moves, USDC stable
• IL typically: 2-8%+
• Significant risk

Opposite-moving pairs (extreme IL):

• Rare, but catastrophic
• IL can exceed 20%
• Avoid unless you understand risk

2. Correlation Between Tokens

High correlation = low IL

Example: ETH/WBTC

• Both are crypto assets
• Tend to move together
• IL typically minimal (0.5-2%)

Low correlation = high IL

Example: ETH/USDC

• ETH is volatile crypto
• USDC is stablecoin
• IL typically significant (2-8%+)

Rule of thumb: Use correlated pairs to minimize IL risk.

3. Time in Pool

Longer time = more opportunity for:

• Prices to return (IL disappears)
• Fees to accumulate (offset IL)
• Both positive and negative price movements

Shorter time = less opportunity:

• Prices may not return
• Fewer fees accumulated
• Higher IL risk relative to fees

Impact: Longer positions often perform better (more fees, IL may disappear).

4. Fee Generation

High fees can offset IL:

Example:

• IL: -5%
• Fees earned: +8%
• Net: +3% (still profitable)

Low fees can't offset IL:

Example:

• IL: -5%
• Fees earned: +2%
• Net: -3% (lost money)

Key insight: IL is relative to fees. High-fee pools can tolerate more IL.

Strategies to Minimize Impermanent Loss

Strategy 1: Use Correlated Pairs

Action: Provide liquidity to pairs with high correlation

Best pairs:

• ETH/WBTC (both crypto, high correlation)
• USDC/USDT (both stablecoins, near-perfect correlation)
• ETH/stETH (ETH and staked ETH, very high correlation)

Avoid:

• Uncorrelated pairs (ETH/USDC, ETH/altcoins)
• Opposite-moving pairs
• Pairs where one is stable and one is volatile

Why it works: Correlated pairs move together, minimizing relative price change and IL.

Example:

• ETH/WBTC: Both up 50% → IL: ~2%
• ETH/USDC: ETH up 50%, USDC stable → IL: ~5.72%

Benefit: 3x less IL with correlated pairs.

Strategy 2: Focus on Stablecoin Pairs

Action: Provide liquidity to stablecoin pairs (USDC/USDT, USDC/DAI)

Why it works:

• Minimal price divergence
• IL typically: 0.1-0.5%
• Very low risk

Tradeoff:

• Lower fees (0.01% tier)
• Modest returns
• But very safe

Example:

• USDC/USDT pair
• IL: ~0.1%
• Fees: 5-10% APR
• Net return: ~5-10% APR (very consistent)

Best for: Conservative LPs seeking stable returns.

Strategy 3: Provide Single-Sided Liquidity (Advanced)

Action: Use protocols that let you provide one token (e.g., just ETH)

How it works:

• Protocol handles pairing automatically
• You provide ETH, protocol pairs with USDC
• Reduces IL risk (protocol manages it)

Examples:

• Some DeFi protocols offer single-sided LP
• More complex but reduces IL exposure

Tradeoff: Often lower returns or additional risks.

Strategy 4: Use V3 Concentrated Liquidity Strategically

Action: Set tight ranges around current price (V3)

How it works:

• Concentrate liquidity at current price
• Earn more fees with less capital
• IL still occurs but fees may offset better

Example:

• Set range: $2,400 - $2,600 (current: $2,500)
• If price stays in range: Earn fees, minimal IL
• If price moves outside: Stop earning fees, IL occurs

Tradeoff: Requires active management and monitoring.

This is why V3 LPs need tracking tools—manually monitoring ranges and IL is impractical. Start tracking with PoolShark to see when positions need adjustment.

Strategy 5: Time Your Entry and Exit

Action: Enter when prices are stable, exit when prices return

How it works:

• Avoid entering during high volatility
• Monitor prices and exit when they return to entry
• Reduces chance of permanent IL

Example:

• Enter: ETH at $2,500 (stable period)
• Price moves to $3,000 (IL exists)
• Wait for return to $2,500
• Exit: IL disappears, keep fees

Tradeoff: Requires patience and monitoring.

Strategy 6: Diversify Across Multiple Pairs

Action: Spread capital across multiple pairs

How it works:

• Not all pairs move together
• Some IL offset by others
• Diversification reduces overall IL risk

Example:

• 50% in ETH/WBTC (correlated, low IL)
• 50% in USDC/USDT (stablecoins, minimal IL)
• Overall IL risk: Low

Benefit: Reduces concentration risk.

Calculating Your Real Returns: Fees vs IL

The Complete Picture

Real Return = Fees Earned - Impermanent Loss - Gas Costs

Example calculation:

Setup:

• Capital: $10,000
• Pair: ETH/USDC
• Hold period: 90 days

Fees earned:

• Daily: $10
• Total: $10 × 90 = $900
• APR: ($900 / $10,000) × (365/90) = 36.5%

Impermanent loss:

• ETH price moved from $2,500 to $3,000 (20% up)
• IL: -$200 (2%)

Gas costs:

• Add liquidity: $50
• Remove liquidity: $50
• Total: -$100

Real return:

• Gross fees: $900
• Minus IL: -$200
• Minus gas: -$100
• Net: $600
• Real APR: 24.3%

Verdict: Still profitable, but 12% lower than gross APR suggests.

This is why tracking real returns is essential—gross APRs are misleading. Start tracking with PoolShark to see your actual returns after IL and gas.

Common IL Scenarios and Outcomes

Scenario 1: Both Tokens Increase Equally

Example: ETH/WBTC

• Both up 50%
• IL: ~2%
• Fees: 30% APR
• Net: +28% APR

Outcome: Excellent returns, minimal IL impact.

Scenario 2: One Token Increases, Other Stable

Example: ETH/USDC

• ETH up 50%, USDC stable
• IL: ~5.72%
• Fees: 25% APR
• Net: +19.28% APR

Outcome: Good returns, but IL significant.

Scenario 3: One Token Increases Dramatically

Example: ETH/INJ

• ETH stable, INJ triples
• IL: ~13.4%
• Fees: 80% APR
• Net: +66.6% APR

Outcome: Strong returns, but IL very high. Risky.

Scenario 4: One Token Decreases

Example: ETH/USDC

• ETH down 50%, USDC stable
• IL: ~5.72%
• Fees: 20% APR
• Net: +14.28% APR

Outcome: Still profitable if fees exceed IL.

Scenario 5: Both Tokens Decrease Equally

Example: ETH/WBTC

• Both down 50%
• IL: ~2%
• Fees: 25% APR
• Net: +23% APR

Outcome: Good returns despite price decline.

Key insight: IL occurs regardless of absolute price direction—it's about relative price change.

IL vs Holding: When LP Beats Holding

When LP Wins

Scenario: High fees + moderate IL

Example:

• Hold tokens: +20% price appreciation
• LP position: +15% price + 30% fees - 5% IL = +40%
• LP wins by 20%

Conditions:

• High trading volume (generates fees)
• Moderate price movement (low IL)
• Fees exceed IL

When Holding Wins

Scenario: Low fees + high IL

Example:

• Hold tokens: +50% price appreciation
• LP position: +35% price + 10% fees - 13% IL = +32%
• Holding wins by 18%

Conditions:

• Low trading volume (few fees)
• Large price movement (high IL)
• IL exceeds fees

The Break-Even Point

Formula: Fees = IL (break-even)

Example:

• IL: 5%
• Need fees: 5% to break even
• If fees > 5%: LP profitable
• If fees < 5%: Holding better

This is why analyzing pools before depositing is crucial—you need fees that exceed expected IL.

Advanced: IL in V3 Concentrated Liquidity

How V3 Changes IL

V2: IL occurs across full price range V3: IL only occurs within your price range

Impact:

• If price stays in range: IL is same as V2
• If price moves outside range: You stop earning fees, IL still occurs
• Concentrated liquidity: More fees but same IL risk

Range Management

Tight range:

• More fees (higher capital efficiency)
• Higher IL risk (price more likely to exit range)
• Requires active management

Wide range:

• Fewer fees (lower capital efficiency)
• Lower IL risk (price stays in range longer)
• More passive approach

Tradeoff: Balance fees vs IL risk vs management effort.

This requires tracking—manually monitoring V3 ranges and IL is nearly impossible. Start tracking with PoolShark to see when positions need adjustment.

Tools and Resources for Tracking IL

Manual Calculation

Formula: IL % = 2 × √(price_ratio) - price_ratio - 1

Online calculators:

• Various DeFi calculators available
• Input entry price and current price
• Get IL percentage

Limitations: Doesn't account for fees, gas, or multiple positions.

Tracking Platforms

What they provide:

• Real-time IL calculation
• Fee tracking
• Net return calculations
• Multi-position monitoring
• Historical performance

Why they're essential:

• Manual calculation is tedious
• Multiple positions make it impossible
• Need to see real returns, not just IL

PoolShark provides: Automatic IL tracking across all positions, real return calculations, and alerts when IL exceeds fees. Start tracking with PoolShark to see your actual performance.

Common IL Mistakes and How to Avoid Them

Mistake #1: Ignoring IL Completely

Problem: Focusing only on fees, ignoring IL risk

Solution: Always calculate expected IL before depositing. Use correlated pairs to minimize risk.

Mistake #2: Assuming IL Is Always Temporary

Problem: Thinking IL will always disappear

Reality: Most LPs withdraw during price divergence, making IL permanent

Solution: Plan for IL becoming permanent. Ensure fees exceed expected IL.

Mistake #3: Using Uncorrelated Pairs

Problem: Providing liquidity to ETH/USDC or other uncorrelated pairs

Solution: Prefer correlated pairs (ETH/WBTC) or stablecoin pairs (USDC/USDT)

Mistake #4: Not Tracking Real Returns

Problem: Assuming gross fees equal net returns

Reality: IL significantly reduces net returns

Solution: Track fees minus IL minus gas. Use tools to automate this.

Mistake #5: Exiting During High IL

Problem: Panicking and withdrawing when IL is high

Solution: If fees are still covering IL, consider holding. IL may decrease if prices return.

Conclusion: IL Is Manageable with the Right Strategy

Impermanent loss is a real risk, but understanding it helps you:

✅ Choose better pairs (correlated = less IL)
✅ Calculate real returns (fees - IL, not just fees)
✅ Minimize IL risk (strategies above)
✅ Track performance (see actual returns)
✅ Make informed decisions (data-driven, not assumptions)

Key takeaways:

• IL occurs when token prices diverge
• Correlated pairs minimize IL risk
• Fees can offset IL if sufficient
• IL becomes permanent when you withdraw during divergence
• Tracking real returns is essential

The difference between profitable and unprofitable LPs often comes down to understanding and managing IL. Many LPs lose money because they ignore IL or don't track real returns.

Ready to track your actual IL and returns? Start tracking your positions with PoolShark to automatically calculate impermanent loss, track fees, and see your real returns across all positions—free for 7 days, no credit card required.

Want to learn more? Check out our guides on liquidity pool returns, real LP earnings, or common LP mistakes. Get started with PoolShark to track your IL and optimize your positions.