Impermanent loss is the amount by which a liquidity pool position underperforms simply holding the same initial tokens. It is a comparison, not necessarily a loss in dollar terms: your position can rise in value and still finish behind holding. Trading fees may offset that shortfall, but they do not change the pool mechanics that create it.
What does “impermanent” mean?
In a standard pool, the comparison changes as the relative prices of its assets change. If their price ratio returns to its entry level while you remain in the pool, the price-divergence shortfall in the no-fee calculation disappears. There is no timetable for that to happen. Withdrawing while prices differ leaves you with the pool’s then-current token mix, rather than the mix you initially deposited.
Keep three measures separate: the current dollar value of your position, its value compared with holding the initial tokens, and the fees and rewards earned along the way. A rental analogy can help: if a hypothetical property rose 40%, its rent checks and its change in value would still be separate parts of the owner’s result. That percentage is only an illustration, not an assumption about pool returns.
Academic surveys examine impermanent loss across different automated market maker designs. The calculation below applies to one specific design, not every pool.
Why does a standard pool change your token mix?
Consider a full-range, two-token constant-product pool. Its reserves follow the relationship x × y = k, before accounting for fees. A trade adds one token to the reserves and removes the other, changing the pool’s quoted price. When that price differs from prices elsewhere, arbitrage trading can bring it toward the broader market price. Uniswap’s own documentation explains reserves and liquidity-provider shares in Uniswap v2 pools; pool prices tethered to market reality describes the broader arbitrage mechanism.
After one asset rises relative to the other, an LP generally owns less of the asset that rose and more of the other than they would have held outside the pool. That changing mix produces the shortfall against holding. Not every AMM uses the same design, and trading fees affect the LP’s net result.
Concentrated liquidity needs a separate assessment. A position may earn more fees per dollar while trades occur within its chosen price range, but that outcome is not assured. If price leaves the range, the position stops earning new swap fees until price re-enters and can consist entirely of one asset. Fees already earned do not automatically disappear. The full-range formula below does not describe the position’s return throughout those changes.
How do you calculate impermanent loss?
For a 50:50, full-range constant-product position, compared with holding the same initial quantities, and excluding fees and costs, let R be the new price of one asset relative to the other divided by its entry price. Then:
Impermanent loss = 2 × √R ÷ (1 + R) − 1
For a hypothetical example, suppose you deposit 1 ETH worth $2,000 and 2,000 USDC worth $2,000. Assume USDC stays at $1, ETH doubles to $4,000, and there are no fees, rewards or transaction costs. Holding the initial tokens would be worth $6,000. The pool position would be worth approximately $5,656.85: about $343.15, or 5.72%, less than holding. It would nevertheless be worth more than the initial $4,000 deposit.
Under the same assumptions, a 25% rise in the relative price gives approximately 0.62% underperformance; a fourfold rise gives 20%. These are price scenarios, not forecasts. The percentage is measured against the value of holding at the new price—not against the initial deposit.
Can trading fees make up the difference?
They can, but past volume does not establish what a particular position will earn. A pool’s fee tier multiplied by its trading volume is not an individual LP’s yield. Your share of eligible liquidity, whether a concentrated position was in range, fee allocation and changes in the pool all matter. Check the actual pool settings rather than treating a displayed percentage such as 0.05% as a return estimate. Uniswap’s fee documentation also shows why fee arrangements differ by protocol version.
For a useful comparison, start with the current value of your position. Add only fees and incentives not already included in that value, including amounts collected earlier in the comparison period. Subtract transaction costs and, if applicable, borrowing interest. Compare that net amount with what the initial tokens would be worth if held. Token rewards have their own price risk and may be temporary. Fees can outweigh the holding shortfall over a period without making the underlying no-fee impermanent-loss calculation smaller.
A trailing seven days of fees can help you frame a scenario, but annualizing a short period assumes activity continues at the same pace. Test lower-volume and larger-price-move cases too. For an introductory discussion of the trade-off, see Impermanent loss in DeFi (SoK-style explainer); for a survey across AMM designs, see Impermanent loss: SoK / survey paper (2026).
What should you check before depositing?
- Pool design: Identify the assets, fee rules and whether the position is full-range or concentrated. If it is concentrated, decide how you would handle a move outside the range.
- Price scenarios: Compare holding with the pool under several plausible relative-price moves over your intended holding period. Do not apply the full-range formula unchanged to a concentrated position.
- Fee history: Examine recent volume, liquidity and fees attributable to a position like yours. Treat history as context, not a promised rate.
- Other losses and costs: Consider depegs, reward-token price changes, smart-contract risk and transaction costs. Assets that usually move together can still separate sharply.
- Exit plan: Decide what would prompt a review or withdrawal, and what token mix you might receive. A single-sided deposit option does not, by itself, mean a protocol absorbs impermanent loss.
What if the capital comes from borrowing against BTC or ETH?
Borrowing stablecoins against crypto you intend to keep is a separate decision from choosing a pool. In OverseasDeFi’s Hold → Borrow → Deploy → Earn educational framework, the borrowing step is something to assess, not a requirement. Depositing borrowed stablecoins does not change that pool’s impermanent-loss mechanics. It adds interest, debt and the possibility of liquidation if collateral value falls or borrowing conditions change. The lending and pool protocols also bring their own risks. Understanding liquidation risk matters before considering such a structure; tax treatment depends on the jurisdiction and transaction details.
When assessing a position, look at pool value, fees, incentives, financing costs and collateral risk together. Portfolio tools and a portfolio-aware AI coach can help frame questions about holdings and debt, but they cannot ensure complete current data, prevent liquidation or decide whether a position fits your circumstances.
FAQ
Is impermanent loss the same as losing money?
No. It measures underperformance against holding the initial assets. A pool position can gain in dollar value while underperforming that comparison, or it can lose dollar value for several reasons at once.
Can impermanent loss go away?
In the standard no-fee comparison, the price-divergence shortfall disappears if the assets’ relative price returns to its entry ratio while the position remains open. You cannot rely on that happening before you need to withdraw.
Do stablecoin pairs eliminate impermanent loss?
No. Prices that stay closely correlated create less relative-price divergence, but a depeg can change that quickly. Contract risk and other pool risks remain.
Does borrowing against BTC or ETH reduce a pool’s impermanent loss?
No. Borrowing changes how you fund a position, not how its pool rebalances. It also creates financing and collateral risks that must be assessed alongside any uncertain fee income.