Impermanent Loss for LPs
Impermanent loss (IL) is the difference between the value of your LP position and the value you'd have had if you'd simply held the same tokens in your wallet.
It's called "impermanent" because, in theory, if the price returns to exactly where it was when you opened the position, the loss disappears. In practice, prices often don't come back — and so the "impermanent" framing can be misleading. Think of it as a real cost that may or may not recover.
IL is the fundamental risk of providing liquidity. Understanding it is non-negotiable before you open any LP position.
Why IL Happens: The Core Mechanism
When you provide liquidity to a pool, you're depositing two tokens. The pool's automated market maker (AMM) rebalances those tokens automatically as the price changes — it sells the token that's going up and buys the token that's going down, to maintain the correct ratio at every price.
The problem: this automatic rebalancing means you end up holding less of the token that appreciated and more of the one that declined. Meanwhile, someone who just held both tokens doesn't get rebalanced — they keep full exposure to the winner.
That difference in value is impermanent loss.
A Worked Example
You open an ETH/USDC LP position when ETH = $2,000. You deposit $1,000 worth of ETH (0.5 ETH) and $1,000 of USDC. Total value: $2,000.
ETH price rises to $4,000. Now:
- If you'd just held: 0.5 ETH × $4,000 + $1,000 USDC = $3,000. ✅
- Your LP position: the pool has been rebalancing throughout the move. At $4,000, you now hold approximately 0.354 ETH + $1,414 USDC = $2,828.
Impermanent loss: $3,000 − $2,828 = $172 (roughly 5.7%).
This is the price you paid for providing liquidity during a 2× price move. The fees you earned during that period go against this number — if you earned more than $172 in fees, the position was net profitable. If you earned less, it was a net loss compared to holding.
IL by price change magnitude
For a standard two-sided AMM position:
| Price change | Approx. IL |
|---|---|
| ±10% | ~0.1% |
| ±25% | ~0.6% |
| ±50% | ~2.0% |
| ±100% (2×) | ~5.7% |
| ±200% (3×) | ~13.4% |
| ±400% (5×) | ~25.5% |
The relationship is non-linear. Small price moves cause small IL; large moves cause disproportionately larger losses. This is why pair selection matters enormously: a stable/pegged pair (e.g., USDC/USDT, flETH/ETH) has almost no IL because the prices barely diverge. A volatile token pair can cause severe IL if the market makes a large move in one direction.
IL in DLMM Pools (Concentrated Liquidity)
In a DLMM pool, IL works the same way — but with important nuances:
1. IL is amplified while in range. Because your liquidity is concentrated into a narrow price band, you're providing more effective liquidity per dollar deposited. That means you earn more fees — but you also experience more rebalancing per unit of price move. The faster rebalancing equals faster IL accumulation while the price is moving within your range.
2. IL freezes when you're out of range. Once the price leaves your bins entirely, your position is 100% in one token and stops rebalancing. Your IL is locked at whatever level it was when price exited — it won't get worse from more price movement in that direction. It also won't get better unless the price comes back.
3. IL resets to zero only if the price returns to your exact entry. If you entered when ETH was $2,000, concentrated your liquidity between $1,800 and $2,200, and the price comes back to $2,000 — your IL at that moment is zero. Any fees earned on top of that are pure profit.
The Fee Trade-Off
Impermanent loss isn't the full story. The question for every LP position is:
Do my earned fees exceed my impermanent loss?
If yes: net profit vs holding. If no: you'd have been better off holding.
This is the core calculation every LP has to estimate before opening a position. A position with:
- High fee revenue (high volume, tight range, popular pair) and low IL (stable pair, small price moves) → likely profitable
- Low fee revenue and high IL (volatile pair, large price move, low volume) → likely a loss
Dynamic fees in DLMM pools partially help here: during volatile periods when IL risk is highest, fees automatically increase to compensate. But they don't cover all scenarios. See Fees vs Impermanent Loss Trade-off → for the detailed math.
Which Pairs Have the Least IL Risk?
Lowest IL risk:
- Stablecoin pairs (USDC/USDT, DAI/USDC): both tokens are pegged to $1, so there's almost no divergence and near-zero IL.
- Pegged pairs (flETH/ETH, wstETH/ETH, LBTC/cbBTC): both tokens track the same underlying asset. Price divergence is minimal.
Moderate IL risk:
- Blue-chip pairs (ETH/USDC, BTC/USDC): significant price moves are possible (50–200%+ over months), but these pairs have high volume, so fee income is also high. The IL/fee balance depends on the time frame and market conditions.
High IL risk:
- Altcoin or new token pairs: small-cap tokens can lose 80–90% of value quickly, causing catastrophic IL in one direction. Fee income rarely compensates for this.
For beginners, starting with pegged or stable pairs is the right approach. DLMM Clan's starter pool recommendations are designed specifically to minimize IL risk for new LPs. See Pegged-Pair LPing 101 →.
Is IL Really "Impermanent"?
The term is technically accurate — the loss disappears if prices return to exactly where they were. But calling it "impermanent" can create false comfort. In reality:
- Prices often don't return to the exact entry point.
- If you close your position (to take profits, exit a position, or move liquidity) before the price returns, the IL becomes realized and permanent.
- Concentrated positions in DLMM pools have more frequent rebalancing, so IL can accumulate quickly during a trend.
Think of IL as a real cost that you're betting will be offset by fee income. Sometimes it is. Sometimes it isn't.
How to Reduce IL in Practice
- Choose low-divergence pairs. Stable and pegged pairs have inherently low IL.
- Use a wider range. A wider price range reduces the amplification effect of concentrated liquidity. You earn less per trade, but you're less exposed to sudden moves.
- Match the range to the volatility. Use historical price charts to set a range the pair has stayed within for weeks, not days.
- Monitor and reshape. If the price trends strongly in one direction, reshaping your position (shifting your bin range in that direction) can reduce IL accumulation versus holding a static position.
- Account for fees honestly. Calculate what fee income you actually need to break even on the IL before you open the position.
For position management strategies, see the LP Risk Management Framework →.
Frequently Asked Questions
Q: What is impermanent loss in simple terms? A: When you provide liquidity in a pool, the pool automatically swaps your tokens as the price changes. This leaves you holding less of the token that went up and more of the one that went down. The gap between what you'd have made by just holding vs what your LP position is worth — that's impermanent loss.
Q: Is impermanent loss the same as losing money? A: It's a cost, not necessarily a loss. If the fees you earn while providing liquidity exceed your IL, the position is profitable. If they don't, you'd have been better off just holding. Many LP positions do earn more in fees than they lose to IL — but not all.
Q: Does impermanent loss apply in DLMM pools? A: Yes. IL applies to any pool where two tokens are paired. In DLMM pools, concentrated liquidity amplifies both fee earnings and IL compared to a full-range pool — so the stakes are higher in both directions.
Q: What pairs have no impermanent loss? A: No pair has exactly zero IL, but stable pairs (USDC/USDT) and pegged pairs (flETH/ETH) come very close because both tokens track the same price. IL occurs when the relative price between the two tokens changes — if they move together, IL is nearly zero.
Q: Is impermanent loss permanent? A: It's "impermanent" in that it reverses if the price returns to your entry. But if you close your position before that happens, or if the price never returns, it becomes a realized (permanent) loss. Don't rely on prices reverting to plan around IL.
Q: How much IL is "acceptable"? A: That depends on your fee income. If you're earning 50% APR in fees on a stable pair with 0.1% IL, that's clearly acceptable. If you're earning 5% APR on a volatile pair that's trending 50% against your position, it's not. Always estimate fee income vs expected IL before entering.