Impermanent Loss Calculator

Impermanent loss (IL) is the difference in value between holding tokens in a liquidity pool versus simply holding them in your wallet. It occurs because automated market makers (AMMs) like Uniswap must rebalance the ratio of tokens in the pool as prices change, resulting in a portfolio that has less value than if you had just held the original tokens.

For example, if you provide liquidity with ETH and USDC, and ETH doubles in price, the AMM will automatically sell some of your ETH for USDC to maintain the 50/50 balance. You end up with fewer ETH than you started with, and the total value of your position is less than if you had simply held your original ETH and USDC.

The loss is called "impermanent" because it only becomes permanent (realized) when you withdraw your liquidity. If the prices of the tokens return to their original ratio, the impermanent loss disappears entirely. This is why it is also sometimes called "divergence loss"—it depends on how much the relative prices of the two tokens have diverged from when you entered the pool.

However, in practice, prices rarely return to the exact same ratio. This means that for most liquidity providers, impermanent loss is effectively a real cost that must be weighed against the trading fees and farming rewards earned.

Uniswap v2 and similar AMMs use the constant product formula: x * y = k, where x and y are the quantities of each token and k is a constant. When a trader swaps token A for token B, the product must remain the same. This creates a price curve where larger trades have more slippage.

As a liquidity provider, you deposit both tokens in equal value (50/50 split). The AMM automatically adjusts the ratio of tokens in the pool as traders swap, always maintaining x * y = k. This rebalancing is the fundamental mechanism that causes impermanent loss.

Impermanent loss depends on the relative price change between the two tokens, not the absolute price change. If both tokens move by the same percentage in the same direction, there is zero IL. The loss increases as the ratio between the two token prices diverges further from the original.

Notice that IL is the same whether the price goes up 2x or down 2x (to 0.5x). It is the magnitude of the divergence that matters, not the direction.

1. Stablecoin pairs: Providing liquidity to pairs like USDC/USDT or DAI/USDC has near-zero IL because the relative price barely changes. The trade-off is lower fees/rewards.

2. Correlated pairs: Pairs like stETH/ETH or wBTC/renBTC have tokens that track each other closely, limiting IL while still earning trading fees.

3. Concentrated liquidity (Uniswap v3): By setting a price range, you can earn much higher fees within that range. However, IL is amplified if the price moves outside your range, and your position becomes 100% one token (full conversion).

4. High-fee pools: Pools with higher trading fees (e.g., 1% fee tier) can offset IL through fee income. Volatile pairs often have higher fee tiers specifically for this reason.

5. Active management: Monitor your positions and withdraw when IL exceeds your fee income. Use tools like this calculator to understand the break-even APY needed before entering a pool.

Providing liquidity is worth it when your total earnings (trading fees + farming rewards) exceed the impermanent loss you experience. This calculator helps you determine the break-even APY—the minimum annual yield needed to make your LP position profitable compared to simply holding.

Generally, LPing is most attractive when: (1) you expect the pair to trade in a range rather than trend strongly in one direction, (2) the pool has high volume relative to its liquidity (generating higher fees), (3) there are additional farming incentives that boost returns, and (4) you are comfortable holding both tokens anyway (so IL is less of a concern since you would be holding them regardless).

Always compare the break-even APY against the actual APY offered by the pool. If the pool APY is significantly above break-even, providing liquidity can be very profitable. If it is below, you are better off just holding the tokens.