Impermanent Loss Calculator
Calculate IL impact on liquidity positions and determine true LP farming profitability
What is Impermanent Loss?
Impermanent loss (IL) is the difference in value you would have received by holding tokens versus providing liquidity. It occurs when the price ratio of two assets in a liquidity pool changes after you deposit them.
Simple Example:
- You deposit 1 ETH + 10,000 USDC to a pool (1 ETH = $10,000)
- Price changes: 1 ETH = $20,000
- If you held: 1 ETH + 10,000 USDC = $30,000
- If you LP'd: ~0.707 ETH + 14,142 USDC = $28,284
- Impermanent Loss: $1,716 (5.7%)
This loss occurs because the pool rebalances automatically, selling your ETH as its price rises to maintain equal value of both assets. You capture less of the upside than by simply holding.
The Impermanent Loss Formula
Where r = (New Price / Original Price)
This formula shows that IL is always negative (a loss). The greater the price divergence (r values far from 1), the larger the IL becomes.
Important: This formula assumes equal deposit amounts. Standard AMM pools (like Uniswap V2) use a constant product formula. The IL formula represents the loss compared to simply holding.
Impermanent Loss at Different Price Movements
Understanding how IL scales with price changes:
| Price Change | Hold vs LP Return | Impermanent Loss | $100 Initial |
|---|---|---|---|
| 1.1x (10%) | +10% vs +4.99% | -0.45% | $199.55 |
| 1.25x (25%) | +25% vs +19.4% | -2.46% | $219.40 |
| 1.5x (50%) | +50% vs +44.21% | -5.72% | $244.21 |
| 2x (100%) | +100% vs +82.84% | -5.71% | $282.84 |
| 3x (200%) | +200% vs +169.91% | -13.39% | $369.91 |
| 5x (400%) | +400% vs +349.63% | -25.53% | $549.63 |
| 10x (900%) | +900% vs +783.32% | -47.99% | $883.32 |
Notice: IL peaks at around 2-3x price movements, then continues increasing but at a slower rate. This is counterintuitive—extreme moves (100x) still cause significant IL despite the diminishing rate.
When LP Farming Is Still Profitable Despite IL
Trading fees can offset impermanent loss. A pool with high volume generates significant fees:
Profitability Formula:
Net Return = Trading Fees - Impermanent Loss
Example Scenarios:
Profitable (ETH/USDC High Volume)
- 20% APY in trading fees
- Price moves 2x (5.7% IL over the year)
- Net Return: 20% - 5.7% = 14.3% profit
Breakeven (Moderate Volume)
- 8% APY in trading fees
- Price moves 2x (5.7% IL)
- Net Return: 8% - 5.7% = 2.3% profit
Loss (Low Volume + High Volatility)
- 3% APY in trading fees
- Price moves 5x (25.5% IL)
- Net Return: 3% - 25.5% = -22.5% loss
Concentrated Liquidity & IL (Uniswap V3)
Uniswap V3 allows you to concentrate liquidity in a narrow price range, increasing capital efficiency and earning more fees per dollar deployed. However, this dramatically increases IL.
Full Range (V2-style)
- Covers 0 to infinity price range
- 5.7% IL at 2x price move
- Lower fee yield but safer
- Capital not efficiently used
Concentrated Range (V3)
- Example: 0.9x-1.1x price range
- 50%+ IL at 1.5x price move (out of range)
- Higher fee yield but risky
- Capital 10-100x more efficient
Key Insight: Concentrated liquidity is best for stable, range-bound pairs (stablecoins, correlated assets). For volatile assets, keep liquidity spread across wider ranges to avoid being knocked out of range.
Strategies to Minimize Impermanent Loss
1. Farm Stablecoin Pools
USDC/USDT, USDC/DAI pools have minimal volatility and therefore minimal IL. IL might be 0.01% even with active trading. Fees still accumulate steadily on high-volume stablecoin pairs.
2. Choose Correlated Asset Pairs
Pairs like ETH/stETH or wBTC/renBTC track each other closely and have lower price volatility relative to each other. IL between correlated assets is naturally lower.
3. Use Concentrated Liquidity Carefully
Set ranges based on 30-day historical volatility. Example: If volatility is 5%, set a 0.95-1.05 range. Wider ranges = safer but lower capital efficiency. Rebalance regularly.
4. High-Volume / High-Fee Pools
Farm pools with 1% fees (Uniswap V3) instead of 0.3% to earn more fee income relative to IL. Example: A volatile pair with 30% APY in fees can overcome even 20% IL.
5. Avoid Farming Trending Assets
Don't LP shitcoins with 500% daily swings. IL on extreme volatility crushes you. Farm assets with stable, predictable trading volumes.
6. Exit Before Major Crashes
Use stop-losses on your LP position. If one asset crashes 50%+, IL becomes permanent. Exit early and redeploy in less volatile pairs.
Fee Income vs IL Breakeven Analysis
To determine if a pool is worth farming, calculate your breakeven point:
Breakeven Calculation:
- Estimate expected APY from trading fees (e.g., 15%)
- Estimate likely price volatility over your farming duration
- Calculate IL at likely price move (e.g., 2x price = 5.7% IL)
- If Fees > IL: Farm it | If Fees < IL: Avoid it
Example Decision Tree:
- ETH/USDC (high volume, low volatility): 20% APY in fees, 5% IL expected → Farm it (15% net gain)
- ALT/USDC (medium volume, medium volatility): 8% APY in fees, 15% IL expected → Avoid it (-7% net loss)
- USDC/DAI (low volatility, stable): 5% APY in fees, 0.1% IL → Farm it (4.9% net gain with minimal risk)