Impermanent Loss Calculator

What Is Impermanent Loss in DeFi?

Impermanent loss (IL) is a concept unique to decentralized finance (DeFi) and specifically to automated market makers (AMMs) like Uniswap, SushiSwap, PancakeSwap, and Curve. When you deposit two tokens into a liquidity pool, the AMM algorithm continuously rebalances your position to maintain the pool's pricing formula. If the price of one token rises significantly relative to the other, the AMM sells some of the appreciating token and buys more of the depreciating one. As a result, your position ends up holding more of the token that lost value and less of the token that gained value, compared to what you would have held if you simply kept the tokens in your wallet. This difference is the impermanent loss. It is called “impermanent” because if prices return to their original ratio, the loss disappears. However, if you withdraw your liquidity while prices are diverged, the loss becomes permanent.

The Impermanent Loss Formula

For a standard 50/50 constant-product AMM pool (the most common type, used by Uniswap V2), the impermanent loss can be calculated using the relative price change between the two tokens:

Here, r represents the ratio of the price changes of the two tokens. If token A doubles in price while token B stays the same, r = 2, and the impermanent loss is approximately 5.72%. If token A increases 5x, the loss grows to about 25.5%. The relationship is non-linear: small price movements cause minimal IL, but large divergences can result in significant losses. This calculator computes the exact IL percentage and translates it into dollar terms based on your initial liquidity deposit, so you can weigh the cost against the trading fees you would earn as a liquidity provider.

Impermanent Loss vs. Trading Fees

Liquidity providers earn a share of the trading fees generated by the pool, typically 0.3% of each trade on platforms like Uniswap V2. The profitability of providing liquidity depends on whether the accumulated fees exceed the impermanent loss over your holding period. High-volume pools with relatively stable token pairs tend to be the most profitable because they generate substantial fees while experiencing minimal price divergence. Conversely, pools with low volume and volatile token pairs may generate insufficient fees to compensate for the IL. When evaluating whether to provide liquidity, you should consider not just the current APY but also the historical price volatility of the token pair and the pool's trading volume. Some DeFi protocols offer additional incentives in the form of liquidity mining rewards (extra tokens) to compensate providers for the risk of impermanent loss.

Strategies to Reduce Impermanent Loss

• Provide liquidity to stablecoin pairs. Pairs like USDC/USDT or DAI/USDC have minimal price divergence, resulting in negligible impermanent loss while still earning trading fees.
• Use concentrated liquidity. Platforms like Uniswap V3 allow you to concentrate your liquidity within a price range, earning higher fees per dollar deployed but requiring more active management.
• Choose correlated asset pairs. Tokens that tend to move together (e.g., ETH and stETH) experience less relative price divergence and therefore less impermanent loss.
• Monitor and rebalance. Actively managing your positions by withdrawing and redepositing when price ratios shift significantly can help limit cumulative impermanent loss.
• Factor in all rewards. Consider trading fees, liquidity mining incentives, and any other rewards when calculating your net return. Sometimes the total compensation exceeds the IL by a wide margin.