Impermanent loss is the main risk for liquidity providers. This guide explains what it is, how to calculate it, and strategies to minimize it.
What is Impermanent Loss?
Impermanent loss occurs when the price of tokens in your LP position changes compared to when you deposited them. It’s the difference between holding tokens in a pool vs. just holding them in your wallet.
IL Quick Reference
| Price Change | IL vs. Holding |
|---|---|
| 1.25x (25% up) | 0.6% |
| 1.5x (50% up) | 2.0% |
| 2x (100% up) | 5.7% |
| 3x (200% up) | 13.4% |
| 5x (400% up) | 25.5% |
Minimizing IL
- Choose correlated pairs (ETH/stETH)
- Use stablecoin pairs (USDC/USDT)
- Set narrower ranges on high-fee pools
- Only LP when you’d be happy holding both tokens