Impermanent Loss vs Holding: When LP Beats HODL
Providing liquidity in an AMM is not the same as holding the two tokens in a wallet. **Impermanent loss (IL)** measures how much worse (or better) the LP position is versus **HODL** at the same exit prices. Trading fees, emissions, and gas determine whether LP or hold wins net.
Core formula
IL% ≈ 2√r/(1+r) − 1 · r = final price ratio (equal-weight 50/50 pool)Step by step
1. Define the price path
Pick starting and ending price ratios (e.g. 1:1 → 2:1). IL depends on divergence, not direction alone—a round trip back to 1:1 removes IL until you withdraw.
2. Estimate IL with the pool formula
For a classic 50/50 constant-product pool, plug the ratio into the IL formula or use the IL calculator. A 2× move on one leg is often ~5–6% IL vs hold before fees.
3. Add fee income and costs
Subtract IL from LP fees + incentives, then subtract gas, slippage, and tax. If net is negative vs hold, you needed higher volume or a stabler pair.
LP vs holding (side by side)
Neither side wins in every market—match the strategy to volatility and fee depth.
- Hold (HODL): Simple; no IL; no fee income; full exposure to both tokens.
- LP (AMM): Earns swap fees; suffers IL when prices diverge; smart-contract risk.
- Stable pairs: IL often small; fees can dominate if volume is high.
- Volatile pairs: IL grows with large moves; fees must be modeled at realistic volume.
Use our calculators
Common mistakes
- Ignoring gas and MEV on small positions
- Comparing LP APY to spot gains without IL at exit prices
- Using peak fee APY from a bull week as a long-run assumption
FAQ
Can IL be positive?
Versus hold, IL is usually negative when prices diverge. Fees can still make the LP position profitable overall.
Does IL apply to concentrated liquidity?
The exact formula changes, but the core idea remains: rebalancing vs hold can hurt when prices move.