Impermanent Loss Calculator

About Impermanent Loss Calculator

Welcome to the Impermanent Loss Calculator, an essential DeFi tool for liquidity providers. This calculator helps you understand and quantify impermanent loss (IL) when providing liquidity to Automated Market Maker (AMM) protocols like Uniswap, SushiSwap, PancakeSwap, Curve, and Balancer. Whether you are a seasoned DeFi farmer or just starting your liquidity provision journey, understanding impermanent loss is crucial for making informed investment decisions.

What is Impermanent Loss?

Impermanent loss is the difference in value between holding tokens in a liquidity pool versus simply holding them in your wallet (the "HODL" strategy). When you provide liquidity to an AMM, you deposit two tokens at a certain price ratio. As the market price changes, arbitrage traders rebalance your pool position, which can result in you having less value than if you had simply held the tokens.

The term "impermanent" is used because the loss only becomes realized (permanent) when you withdraw your liquidity. If the price returns to its original ratio before you withdraw, the loss disappears entirely. However, if you withdraw while prices have diverged, the loss becomes permanent.

Why Does Impermanent Loss Occur?

AMMs use mathematical formulas (like the constant product formula x * y = k) to maintain liquidity across all price ranges. When external market prices change:

• Arbitrage traders buy the underpriced token from your pool
• They sell the overpriced token into your pool
• This rebalances your holdings away from your original ratio
• You end up with more of the token that decreased in value and less of the token that increased

This automatic rebalancing is what causes impermanent loss - the pool mechanically sells your winners and buys more losers.

Impermanent Loss Formula

Standard 50/50 Pool Formula

For standard AMM pools like Uniswap V2 with equal 50/50 weighting:

Where:

• IL = Impermanent Loss (as a decimal, multiply by 100 for percentage)
• price_ratio = Current Price / Initial Price
• sqrt = Square root function

Impermanent Loss Reference Table

Here are common price change scenarios and their corresponding impermanent loss:

Notice that impermanent loss is symmetrical - a 50% price drop and a 100% price increase both result in the same 5.72% loss. The loss accelerates dramatically with larger price movements.

Understanding Pool Types

Standard 50/50 Pools

Most AMMs (Uniswap, SushiSwap, PancakeSwap) use 50/50 pools where half your value is in each token. These pools experience the standard impermanent loss curve shown above.

Weighted Pools (80/20, 95/5)

Protocols like Balancer allow weighted pools with unequal ratios. In an 80/20 pool:

• 80% of your value is in the primary token (e.g., ETH)
• 20% of your value is in the secondary token (e.g., stablecoin)
• IL from price changes in the 80% token is significantly reduced
• IL from price changes in the 20% token is amplified

Weighted pools are popular for projects wanting to maintain majority exposure to their native token while still providing liquidity.

How to Use This Calculator

1. Enter initial token price: Input the price of your volatile token when you first provided liquidity. For example, if you entered an ETH/USDC pool when ETH was $2,000, enter 2000.
2. Enter current token price: Input the current market price. If ETH is now $3,000, enter 3000.
3. Enter investment amount: Your total initial investment in USD. This helps calculate dollar-denominated gains and losses.
4. Select pool type: Choose 50/50 for standard AMMs like Uniswap, or select weighted pools for Balancer-style pools.
5. Analyze results: Review your impermanent loss percentage, compare LP vs HODL values, check the break-even fee APY, and explore the interactive IL curve.

Understanding Your Results

Key Metrics Explained

• Impermanent Loss %: The percentage of value lost compared to holding. A -5% IL means your LP position is worth 5% less than if you had just held the tokens.
• HODL Value: What your tokens would be worth if you had simply held them in your wallet without providing liquidity.
• LP Value: The current value of your liquidity position after accounting for impermanent loss (before trading fees).
• Dollar Loss: The actual USD difference between HODL and LP values.
• Break-even Fee APY: The minimum annual trading fee yield needed to offset your impermanent loss. If your IL is 5%, you need at least 5% APY from trading fees to break even.

The IL Curve Chart

The interactive chart shows how impermanent loss changes across different price ratios. Key insights:

• The curve is U-shaped, with minimum loss at the original price (1x)
• Loss accelerates as prices diverge further from the original
• Your current position is marked with a star on the curve
• Hover over points to see exact IL values at different price levels

Strategies to Minimize Impermanent Loss

1. Provide Liquidity to Correlated Pairs

Pairs where both tokens tend to move together (like stablecoin pairs USDC/USDT or wrapped asset pairs wBTC/renBTC) experience minimal impermanent loss since the price ratio stays relatively stable.

2. Choose High-Fee Pools

Pools with higher trading fees (0.3% vs 0.05%) generate more fee revenue to offset IL. High-volume pools with elevated fees can often overcome significant IL through fee accumulation.

3. Use Concentrated Liquidity Strategically

Uniswap V3 allows concentrated liquidity within price ranges. While this amplifies both fees and IL, strategic range placement can optimize returns if prices stay within your range.

4. Consider Weighted Pools

If you are bullish on a specific token, an 80/20 or 95/5 weighted pool lets you maintain high exposure while still earning fees, with reduced IL from price increases in that token.

5. Time Your Entry and Exit

Since IL is impermanent until withdrawal, timing matters:

• Enter pools when you believe the price ratio is relatively stable
• Avoid withdrawing during extreme price divergence
• Consider waiting for prices to return closer to your entry ratio

6. Use IL Protection Protocols

Some DeFi protocols offer impermanent loss protection through insurance-like mechanisms or token incentives that compensate LPs for IL.

When is Providing Liquidity Profitable?

Despite impermanent loss, liquidity provision can be profitable when:

• Trading fees exceed IL: High-volume pools generate substantial fees that can more than compensate for IL
• Liquidity mining rewards: Many protocols incentivize LPs with additional token rewards
• Prices remain stable: Low volatility pairs experience minimal IL
• Prices return to entry ratio: If you can hold until prices normalize, IL disappears
• Strategic positioning: Providing liquidity at what you believe is fair value for long-term holding

Impermanent Loss vs Other Risks

IL vs Smart Contract Risk

While IL is a mathematical certainty given price changes, smart contract risk involves potential bugs or exploits. Both should be considered when choosing pools.

IL vs Opportunity Cost

Beyond IL, consider what else you could do with your capital - staking, lending, or other yield strategies might offer better risk-adjusted returns.

IL vs Gas Costs

On Ethereum mainnet, high gas fees can eat into profits. Factor in entry and exit transaction costs when calculating net returns.

Frequently Asked Questions

What is impermanent loss?

Impermanent loss (IL) is the difference between holding tokens in a liquidity pool versus simply holding them in your wallet. It occurs when the price ratio of pooled tokens changes from when you deposited them. The loss is called "impermanent" because it only becomes permanent when you withdraw your liquidity. If prices return to their original ratio, the loss disappears.

How is impermanent loss calculated?

For a standard 50/50 AMM pool, impermanent loss is calculated using the formula: IL = 2 * sqrt(price_ratio) / (1 + price_ratio) - 1, where price_ratio is the current price divided by the initial price. For example, if a token doubles in price (2x), the impermanent loss is approximately 5.72%. If the price increases 5x, the loss is about 25.46%.

Can impermanent loss be avoided?

Impermanent loss cannot be completely avoided when providing liquidity to variable-price token pairs. However, you can minimize it by: providing liquidity to stablecoin pairs (minimal price variation), using concentrated liquidity positions strategically, choosing pools with high trading fees that offset IL, or using single-sided staking options when available.

What is the difference between 50/50 and weighted pools?

Standard AMM pools like Uniswap use a 50/50 ratio, meaning half your value is in each token. Weighted pools (like Balancer) allow different ratios such as 80/20 or 95/5. Higher weight pools experience less impermanent loss from price changes in the dominant token but more loss from price changes in the smaller-weight token. An 80/20 pool has roughly 60% less IL than a 50/50 pool for the same price movement in the 80% token.

When does impermanent loss become permanent?

Impermanent loss becomes permanent (realized) only when you withdraw your liquidity from the pool. If you keep your position and prices return to the original ratio, the impermanent loss disappears completely. This is why it is called "impermanent". Many liquidity providers wait for favorable price ratios before withdrawing or rely on trading fees earned to offset potential losses.

Is providing liquidity still profitable with impermanent loss?

Yes, liquidity provision can be profitable despite IL. The key is whether trading fees, liquidity mining rewards, and other incentives exceed your impermanent loss. High-volume pools with good fee structures often generate returns that more than compensate for IL, especially for pairs with moderate volatility.

How much APY do I need to break even?

Your break-even APY equals your impermanent loss percentage (assuming annual holding). If your IL is 5%, you need at least 5% APY from trading fees to break even. Our calculator shows this break-even APY for your specific scenario.

Additional Resources

Learn more about impermanent loss and DeFi liquidity provision:

• Uniswap V3 Concentrated Liquidity Documentation
• Balancer Weighted Pools Explained
• Impermanent Loss Explained - Binance Academy