Impermanent Loss Calculator
Use our free Impermanent loss Calculator to plan your crypto trading strategy. Get detailed breakdowns, charts, and actionable insights.
Formula
IL = 2 × √(price_ratio) / (1 + price_ratio) - 1
Impermanent loss is calculated using the price ratio between the current and initial price of the volatile token in a 50/50 liquidity pool. The formula compares the value of assets in the pool (LP value) to the value if you had simply held the assets (hold value). The result is always negative or zero, representing the percentage loss from providing liquidity.
Worked Examples
Example 1: ETH Price Increase in ETH/USDC Pool
Problem: You provide $10,000 to an ETH/USDC pool when ETH is $3,000. ETH rises to $4,500. What is your impermanent loss?
Solution: Price ratio = $4,500 / $3,000 = 1.5\nIL = 2 × sqrt(1.5) / (1 + 1.5) - 1 = 2 × 1.2247 / 2.5 - 1 = -1.96%\nHold Value = $10,000 × (1 + 1.5) / 2 = $12,500\nLP Value = $12,500 × (1 - 0.0196) = $12,255\nDollar Difference = -$245
Result: IL: ~1.96% | Hold Value: $12,500 | LP Value: ~$12,255 | Loss: ~$245
Example 2: Token Price Drop by 50%
Problem: You provide $20,000 to a TOKEN/USDC pool. Token A drops from $100 to $50. Calculate the impermanent loss.
Solution: Price ratio = $50 / $100 = 0.5\nIL = 2 × sqrt(0.5) / (1 + 0.5) - 1 = 2 × 0.7071 / 1.5 - 1 = -5.72%\nHold Value = $20,000 × (1 + 0.5) / 2 = $15,000\nLP Value = $15,000 × (1 - 0.0572) = $14,142\nDollar Difference = -$858
Result: IL: ~5.72% | Hold Value: $15,000 | LP Value: ~$14,142 | Loss: ~$858
Frequently Asked Questions
What is impermanent loss in DeFi?
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 constantly rebalance the ratio of tokens in the pool as prices change. When one token's price increases relative to the other, the AMM sells the appreciating token and buys the depreciating one, resulting in fewer of the winning token than if you had just held. The loss is called 'impermanent' because it only becomes permanent if you withdraw your liquidity. If the token prices return to their original ratio, the impermanent loss disappears.
How is impermanent loss calculated?
Impermanent loss is calculated using the formula: IL = 2 × sqrt(price_ratio) / (1 + price_ratio) - 1, where price_ratio is the current price divided by the initial price of the volatile token. For a 50/50 liquidity pool, if one token doubles in price (2x), the IL is approximately 5.7%. If it triples (3x), IL is about 13.4%. If it goes to 5x, IL reaches 25.5%. The formula applies regardless of which direction the price moves — a 50% price decrease also results in 5.7% IL. This means any deviation from the initial price ratio results in some degree of impermanent loss, with larger deviations causing exponentially greater losses.
Can trading fees offset impermanent loss?
Yes, trading fees earned from the liquidity pool can offset impermanent loss, and this is the primary reason liquidity providers participate despite IL risk. Every time someone trades through the pool, a fee (typically 0.3% on Uniswap V2) is distributed proportionally to all liquidity providers. High-volume pools with many trades generate substantial fee income that can exceed the impermanent loss. For example, a pool earning 50% APY in fees but experiencing 5% IL would still net 45% returns. However, in low-volume pools or during extreme price movements, fees may not be sufficient to cover IL. Always evaluate the expected fee income against potential impermanent loss before providing liquidity.
How can I minimize impermanent loss?
Several strategies can help minimize impermanent loss. First, provide liquidity to stablecoin pairs (like USDC/USDT) where price deviations are minimal. Second, use concentrated liquidity positions on Uniswap V3 with tight price ranges that earn more fees. Third, choose correlated pairs like stETH/ETH where both assets move similarly. Fourth, use protocols with IL protection like Bancor which reimburse IL over time. Fifth, select high-volume pools where fee income compensates for IL. Sixth, consider single-sided staking protocols that eliminate IL entirely. Finally, actively manage your positions — adding liquidity when prices are stable and removing when significant price movements occur.
Is impermanent loss always negative?
Yes, impermanent loss is always a cost compared to simply holding the assets. The formula always yields a negative result (or zero if prices remain unchanged), meaning you always have fewer assets in dollar terms as a liquidity provider compared to holding. However, the total return from liquidity provision includes both IL and earned fees. When trading fees exceed the impermanent loss, your total return is positive and can exceed simple holding. This is why it is essential to consider IL as one component of the total return equation, not the only factor. Many profitable liquidity providers accept IL as a cost of doing business, similar to how insurance companies accept claims as a cost of collecting premiums.
What formula does Impermanent Loss Calculator use?
The formula used is described in the Formula section on this page. It is based on widely accepted standards in the relevant field. If you need a specific reference or citation, the References section provides links to authoritative sources.