Impermanent Loss Calculator
Understand the risks of providing liquidity in DeFi. Calculate IL, compare LP rewards vs simply holding, and determine if yield farming is profitable for your strategy.
Calculator
What is Impermanent Loss?
Impermanent Loss is the difference between holding tokens in your wallet versus providing them as liquidity in a DeFi pool. When token prices diverge from their initial ratio, liquidity providers (LPs) experience this "loss" compared to simply holding the tokens.
Key Points:
- •Called "impermanent" because it can be recovered if prices return to their original ratio
- •Larger when one token's price changes significantly relative to the other
- •Trading fees can offset or exceed impermanent loss in high-volume pools
- •Most severe with volatile token pairs; minimal with stablecoin pairs
Example Scenarios
Load a pre-configured scenario to see impermanent loss in action
Impermanent Loss Calculator
Enter your token prices and pool details to calculate potential impermanent loss
Token A
Token B
Pool Details
Total value deposited (50/50 split)
Average: 20-30% for popular pairs
Duration to calculate fee earnings
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The Math Behind Impermanent Loss
Impermanent Loss occurs because AMMs use the constant product formula: x × y = k. When prices change, the pool rebalances to maintain this invariant. Here's what happens:
Example: ETH doubles from $2,000 to $4,000
- Initial: 1 ETH + $2,000 USDC = $4,000 total value
- If you HODL: 1 ETH ($4,000) + $2,000 USDC = $6,000 total
- If you LP: ~0.707 ETH ($2,828) + $2,828 USDC = $5,656 total
- Impermanent Loss: $6,000 - $5,656 = $344 (5.7% loss)
The pool sold some of your winning ETH to buy more USDC, leaving you with less exposure to the appreciating asset. You need to earn more than $344 in fees to profit from LP.
When Liquidity Providing Makes Sense
✓ Good Use Cases for LP
- Stablecoin Pairs: USDC-USDT, DAI-USDC (near-zero IL, 5-15% APR from fees)
- Correlated Assets: stETH-ETH, WBTC-ETH (low IL, 8-20% APR)
- High-Volume Pairs: ETH-USDC on Uniswap (20-50% APR can offset moderate IL)
- Short Time Horizons: Hours to days with tight stop-losses (farming rewards)
- Neutral Market View: You're equally bullish on both assets long-term
✗ Bad Use Cases for LP
- Volatile Pairs: ALT-ETH, memecoins (50%+ IL risk, fees rarely compensate)
- Strong Conviction: You're very bullish on one asset (just HODL it instead)
- Low-Volume Pools: <5% APR in fees won't offset even small IL
- Long Time Horizons: Months to years with volatile assets (IL compounds)
- Neglected Positions: Uniswap V3 requires active management
Advanced LP Strategies
Strategy 1: Concentrated Liquidity (Uniswap V3)
Provide liquidity in a narrow price range (e.g., $1,950-$2,050 for ETH-USDC) to earn 3-10x more fees. Works best for stablecoins or if you actively manage and can rebalance when price exits range.
Risk: High IL if price moves sharply outside range and you don't rebalance.
Strategy 2: Auto-Compounding Vaults
Use Yearn, Beefy, or Convex to automatically harvest rewards and compound them back into the pool. Optimal for maximizing yield on stablecoin pairs without manual rebalancing.
Risk: Smart contract risk from additional vault layer, but reduced gas costs.
Strategy 3: Delta-Neutral Hedging
LP with ETH-USDC while simultaneously shorting ETH on a perpetual exchange. This neutralizes IL (you profit from both sides of price moves) and you keep 100% of trading fees.
Risk: Funding rate costs, liquidation risk, requires constant monitoring.
Frequently Asked Questions
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