Intermediate

What Is an Impermanent Loss?

By DappAtlas editors ·

On this page

Impermanent loss is the drop in value of a liquidity provider's position compared with holding the same tokens outside the pool. It happens when the price of one token changes relative to the other, and it shrinks back to zero if the price returns to where it was.

Key takeaways

  • It is measured against holding the tokens, not against your deposit in dollars.
  • In a 50/50 constant-product pool, IL = 2*sqrt(r)/(1+r) - 1, where r is the price ratio.
  • A 2x price change gives about 5.7% loss; a 5x change about 25.5%.
  • The loss is the same whether the price rises or falls by the same factor.
  • Trading fees earned can offset it.

Why it happens

A constant-product pool keeps the product of its two reserves fixed. When the market price moves, traders buy the cheaper token from the pool until its price matches, so the pool ends up holding more of the token that fell and less of the one that rose.[1]

The formula

For a 50/50 constant-product pool such as Uniswap v2: impermanent loss = 2 * sqrt(r) / (1 + r) - 1, where r is the new price divided by the price at deposit.[1]

Worked example

If ETH doubles against USDC, r = 2. Then 2 * sqrt(2) / 3 - 1 = 2.828 / 3 - 1 = -0.057, so the position is worth about 5.7% less than holding. A halving (r = 0.5) gives the same 5.7%.[1]

Why it is called impermanent

If the price returns to the ratio at deposit, the loss disappears. It becomes permanent when you withdraw while the price is different.[1]

The Bottom Line

Providing liquidity pays trading fees but costs you value when prices diverge. Compare expected fees with the loss for the price moves you expect.

Educational content, not financial advice.

Token approvalPermission you give an app to move your tokens.Gas feeWhat you pay the network to process a transaction.Self-custodyHolding your own keys instead of trusting an exchange.
Pros
  • Fees paid by traders can exceed the loss
  • The loss reverses if the price returns
Cons
  • Larger price moves mean larger losses
  • It applies in both directions of price movement
Sources (1)
  1. [1] Uniswap docs. “Understanding returns (Uniswap v2).” Accessed Sep 26, 2026.
DeFi

Impermanent loss FAQ

Is impermanent loss a real loss?

Only when you withdraw at a different price ratio than at deposit. Until then it is a gap versus holding.

How much do I lose if the price doubles?

About 5.7% compared with holding the tokens, before trading fees, in a 50/50 constant-product pool.

How this page works

Sources: Uniswap docs. Data as of Sep 26, 2026.

How we review

Not affiliated with any project listed. Educational content, not financial advice.