What Is Impermanent Loss in Crypto?

Impermanent loss is the opportunity cost an LP incurs when the price ratio of the pool's tokens changes. Because AMM pools rebalance automatically on every trade, a provider ends up with more of the depreciating asset and less of the appreciating one than they'd have by simply holding. The loss is "impermanent" only if the price ratio returns to its original level — otherwise it's realized on withdrawal.

Also known as: IL, divergence loss

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How impermanent loss arises

Imagine you deposit 1 ETH + 3,000 USDC into an ETH/USDC pool when ETH is $3,000. Your share of the pool is $6,000.

ETH rallies to $4,000. Arbitrageurs rebalance the pool — they buy ETH from the pool until its internal price matches the market $4,000. When you withdraw, you receive a lower amount of ETH and a higher amount of USDC than you deposited. Your position is now worth, say, $7,100.

Compare that to just holding 1 ETH + 3,000 USDC: $4,000 + $3,000 = $7,000. You made more than HODLing in this case, wait…

Actually no — the math runs the other way. The correct example: you would have $7,000 if you just held. You have ~$6,928 in the pool (the constant-product curve + the fee income works out to less than HODL on a one-way move). The gap is IL. For a 2x price move, IL is ~5.7%. For a 5x move, IL is ~25.5%. For a 10x move, ~42.5%.

The only offset is trading fees earned during the hold — which is why high-volume pools (Curve stables, Uniswap V3 concentrated positions in tight ranges) can outperform HODL despite IL.

Where IL bites hardest

  • Volatile pair vs HODL — ETH/USDC pools during strong ETH moves. IL can eat 10-20% on top of the fees earned.
  • Low-volume LP positions — if the pool doesn’t generate fees, there’s no offset for IL. Net negative vs HODL.
  • Uniswap V3 out-of-range positions — concentrated liquidity that falls outside the active range collects no fees while still bearing IL.

Risks and considerations

IL is often invisible in APY dashboards — they quote fee APY without subtracting IL. Tools like Revert Finance, APY.Vision, and the Uniswap analytics tab compute realized IL, but most retail LPs don’t check.

Practical IL-aware strategies:

  • Prefer stable-stable pools (USDC/USDT/DAI) where price divergence is minimal. IL stays below 0.5% in normal conditions.
  • Use correlated-asset pools (ETH/stETH, BTC/WBTC) where the two assets move together and IL stays small.
  • For volatile pairs, demand high APY (30%+) to compensate for expected IL. A 5% APY on an ETH/USDC pool is almost guaranteed to underperform HODLing ETH over a full cycle.

Related terms

Liquidity Pool A liquidity pool is a smart-contract-held reserve of two (or more) tokens that traders swap against. AMM An automated market maker (AMM) is a DEX that prices trades against a pool of assets using a deterministic formula, rather than matching buyers and sellers v… Yield Farming Yield farming is the practice of moving capital between DeFi protocols to earn the highest available yield — usually a combination of trading fees, lending i… DEX A DEX (decentralized exchange) is a smart-contract-based venue where users trade assets without handing custody to a company.