Impermanent loss (IL) is the difference between holding tokens in a liquidity pool versus holding them in your wallet. Understanding IL is crucial for profitable LP strategies.
How IL Occurs
When you provide liquidity, the pool automatically rebalances as prices change. If one token rises significantly, the pool sells it for the other token—meaning you end up with less of the winning asset.
IL by Price Change
- 25% price change = 0.6% IL
- 50% price change = 2.0% IL
- 100% price change (2x) = 5.7% IL
- 400% price change (5x) = 25.5% IL
Mitigating IL
Choose correlated pairs (stablecoin pools have minimal IL). Ensure trading fees exceed potential IL. Consider single-sided liquidity options. Use IL calculators before entering positions.