Impermanent Loss Calculator: LP Position Risk Assessment
Financial Disclaimer
This impermanent loss calculator is for educational purposes only. Impermanent loss is a complex risk that depends on many factors. Always do your own research before providing liquidity.
Table of Contents
What is Impermanent Loss?
Impermanent loss (IL) is the temporary loss of value experienced by liquidity providers when the price ratio of tokens in their pool changes. It's called "impermanent" because the loss is only realized when you withdraw your liquidity from the pool.
This calculator helps you understand and quantify impermanent loss in different scenarios, helping you make informed decisions about liquidity provision in automated market makers (AMMs) like Uniswap, SushiSwap, and PancakeSwap.
Understanding IL is crucial for successful yield farming strategies, as it can significantly impact your returns from liquidity mining and other DeFi activities.
Understanding Impermanent Loss
The Core Concept
When you provide liquidity to an AMM pool, you deposit equal values of two tokens (e.g., ETH and USDC). The pool uses these tokens to facilitate trading, maintaining the constant product formula (x × y = k).
If the price of one token changes relative to the other, the pool rebalances to maintain the constant product. When you withdraw your liquidity, you get different amounts of each token than you originally deposited, leading to impermanent loss.
When IL Occurs
- • Price ratio changes between pool tokens
- • Higher volatility in token prices
- • Longer holding periods in the pool
- • Extreme price movements (bull/bear markets)
- • Correlated vs uncorrelated token pairs
IL Characteristics
- • Asymmetric: Losses are not equally distributed
- • Temporary: Only realized upon withdrawal
- • Non-linear: Increases with price movement magnitude
- • Pool-specific: Depends on pool composition
- • Time-dependent: Accumulates over holding period
How Impermanent Loss Works
Simple Example
You deposit $5,000 worth of ETH and $5,000 worth of USDC into a pool (50/50 split).
• ETH: 1 ETH ($5,000)
• USDC: 5,000 USDC ($5,000)
• Total: $10,000
After Price Change
ETH price doubles to $10,000. The pool rebalances to maintain constant product.
• ETH: ~0.707 ETH ($7,070)
• USDC: ~7,070 USDC ($7,070)
• Total: $14,140 (vs $15,000 if held)
The Opportunity Cost
If you had simply held the tokens instead of providing liquidity:
• ETH: 1 ETH × $10,000 = $10,000
• USDC: 5,000 USDC × $1 = $5,000
• Total: $15,000
IL = $15,000 - $14,140 = $860 (5.7% loss)
The Mathematics of Impermanent Loss
IL Formula for Equal-Weighted Pools
For a pool with equal value of two tokens, the impermanent loss can be calculated using this formula:
Understanding the Formula
• Symmetric: IL is the same whether price goes up or down by the same ratio
• Non-linear: Small price changes have minimal IL, large changes have significant IL
• Time-independent: The formula doesn't include time, only price ratio change
• Pool-agnostic: Same for any equal-weighted pool with the same price ratio change
Factors Affecting IL Risk
Token Characteristics
- • Volatility: Higher volatility = higher IL risk
- • Correlation: Correlated pairs have lower IL
- • Market Cap: Large-cap tokens tend to be more stable
- • Liquidity: Deep liquidity reduces price impact
- • Trading Volume: Higher volume = more stable prices
Pool Characteristics
- • Pool Weighting: Equal-weighted pools have highest IL
- • Fee Tiers: Higher fees can offset IL over time
- • Pool Age: Newer pools may be more volatile
- • TVL: Higher TVL = more stable pool
- • Token Selection: Stablecoin pairs have minimal IL
IL Risk Levels by Pair Type
USDC/USDT, DAI/USDC
Very Low IL
BTC/ETH, ETH/USDC
Moderate IL
LINK/ETH, AAVE/ETH
High IL
MEME/ETH, NEW/ETH
Extreme IL
IL Mitigation Strategies
Pool Selection Strategies
- • Choose stablecoin pairs for minimal IL
- • Select correlated token pairs (BTC/ETH)
- • Avoid highly volatile altcoin pairs
- • Consider concentrated liquidity pools
- • Use pools with high trading volume
Position Management
- • Monitor positions regularly
- • Set IL thresholds for rebalancing
- • Use dollar-cost averaging for entry
- • Consider impermanent loss insurance
- • Diversify across multiple pools
Advanced Techniques
- • Use single-sided staking when available
- • Implement dynamic position sizing
- • Hedge IL with options or futures
- • Use IL-optimized protocols (e.g., Gamma)
- • Time entries during low volatility
Risk-Reward Analysis
- • Calculate break-even trading fees
- • Compare IL vs reward APYs
- • Factor in gas costs and slippage
- • Consider opportunity cost of capital
- • Use this calculator for scenario analysis
Real-World Examples
ETH/USDC Pool (2021)
During the 2021 bull run, ETH price increased from $2,000 to $4,800.
• Price ratio change: 2.4x
• Impermanent loss: ~9.8%
• Trading fees earned: ~8-12% APY
• Net result: Slightly negative to positive
BTC/ETH Pool (2022)
During the 2022 bear market, both assets declined but at different rates.
• BTC down 60%, ETH down 70%
• Price ratio change: 1.4x
• Impermanent loss: ~3.2%
• Trading fees earned: ~5-8% APY
• Net result: Positive despite price declines
Key Takeaways from Real Examples
• IL can be offset by trading fees in volatile markets
• Stablecoin pairs have minimal IL even in extreme conditions
• High fee tiers (1%) can break even with smaller price movements
• Long-term holding amplifies IL impact
• Correlated pairs perform better than uncorrelated pairs
Frequently Asked Questions
Is impermanent loss permanent?
No, impermanent loss is only "permanent" if you withdraw your liquidity at an unfavorable price ratio. If prices return to their original ratio, the loss disappears. However, if you need to withdraw during unfavorable conditions, the loss becomes realized.
Do all liquidity pools have impermanent loss?
Yes, all AMM pools using constant product formulas experience impermanent loss when token price ratios change. However, stablecoin pairs (USDC/USDT) have minimal IL because their prices are pegged to stay close to each other.
How can I avoid impermanent loss?
You can't completely avoid IL in AMM pools, but you can minimize it by: choosing stablecoin pairs, selecting correlated assets, providing liquidity for shorter periods, and monitoring positions regularly. Some protocols offer single-sided staking or IL protection mechanisms.
Does impermanent loss affect staking rewards?
IL is separate from staking rewards. You can earn staking rewards on top of your liquidity provision, and these rewards are typically paid in additional tokens. However, if the staked assets experience IL, it affects the overall return from your position.
When should I withdraw from a liquidity pool?
Consider withdrawing when: IL exceeds your risk tolerance, you need the capital elsewhere, the pool's fundamentals change, or you've achieved your target returns. Monitor the price ratio and compare current IL against potential future rewards.