Impermanent Loss: What It Is and How to Calculate It

Impermanent Loss (IL) is the difference between the value of a liquidity position and the value the same tokens would have if you had simply kept them in your wallet instead of depositing them in the pool. This strategy of just holding the tokens is called HODL or hold.

Understanding IL is essential because it answers the most important question for any Liquidity Provider: was it worth putting the tokens in the pool?

Why Impermanent Loss happens

A liquidity pool always keeps a balance between the two tokens in the pair. When the price of one of them goes up, traders buy that token from the pool and leave the other one in its place. As a result, your position ends up with less of the token that gained value and more of the token that fell behind.

That's exactly the opposite of what you'd want: the pool sells the asset that's rising and buys the one that's falling. IL measures the cost of this automatic rebalancing.

The Impermanent Loss formula

For a traditional two-token pool with equal weights (the 50/50 model used by Uniswap V2 and Aerodrome Basic volatile pools), IL depends only on how much the price of one token has changed relative to the other:

IL = 2 × √r ÷ (1 + r) − 1

Where r is the relative price change between the two tokens since the deposit (current price ÷ price at deposit). Some reference values:

• Price changes 1.25× (+25%): IL of −0.6%
• Price changes 1.5× (+50%): IL of −2.0%
• Price changes 2× (+100%): IL of −5.7%
• Price changes 3× (+200%): IL of −13.4%
• Price changes 5× (+400%): IL of −25.5%

Notice that IL is the same whether the price rises or falls by the same ratio: doubling (2×) or halving (0.5×) both produce the same −5.7%.

Impermanent Loss calculation example

You deposit 1 ETH + 2,000 USDC into an ETH/USDC pool when ETH is worth $2,000. Total deposited: $4,000.

Some time later, ETH doubles and is now worth $4,000:

• If you had just held: 1 ETH × $4,000 + 2,000 USDC = $6,000
• In the pool: rebalancing leaves the position with about 0.707 ETH + 2,828 USDC = $5,657
• Impermanent Loss: $5,657 − $6,000 = −$343 (−5.7%)

Note that the position made money compared to the deposit (from $4,000 to $5,657). IL isn't a loss relative to what you deposited, but relative to the alternative of simply holding the tokens.

Fees vs. Impermanent Loss: where fees come in

IL is only half the equation. While your liquidity sits in the pool, it earns the fees paid by traders. The real result of a position is:

Pool vs. hold result = (current position value + fees earned) − hold value

In the example above, if the position had generated $400 in fees over the period, the total would be $5,657 + $400 = $6,057, or $57 more than holding. In that case, the fees covered the IL and the position was worth it. With $200 in fees, the pool would have ended up $143 behind holding.

Why "impermanent"?

If the price returns exactly to its level at the time of deposit, IL goes back to zero. That's why it's called impermanent. But the moment you withdraw your liquidity at a price different from the starting one, the difference becomes permanent.

Impermanent Loss is higher in concentrated liquidity

In concentrated liquidity pools, such as Uniswap V3, Uniswap V4 and Aerodrome Slipstream, your capital sits within a price range. This boosts efficiency and the fees you earn while the price stays in range, but it also amplifies IL: the narrower the range, the bigger the loss for the same price move.

If the price moves out of range, the position ends up 100% in the token that lost relative value and stops earning fees until the price comes back. The formula above only applies to traditional 50/50 pools. With concentrated liquidity, the most reliable way to measure IL is to directly compare the position's value with the hold value.

How to calculate your position's Impermanent Loss in practice

To know whether a position is paying off, keep track of:

• The tokens and their values at the time of deposit
• The current value of the position
• Pending and already collected fees
• What the deposited tokens would be worth today if you had held them

Doing this math by hand for multiple positions across different protocols and networks is a lot of work. The SafeVault Performance Tracker does this comparison automatically: the pool vs. hold comparison shows, in dollars and as a percentage, whether your positions earned more than simply holding the tokens, already factoring in fees and AERO rewards.

Frequently asked questions

Can you avoid Impermanent Loss?
Not entirely. Pairs of correlated assets, such as stablecoins paired with each other, greatly reduce the risk, but any change in relative price creates some IL.

Is Impermanent Loss charged when you exit the pool?
There's no charge. It's already reflected in the position's value; when you withdraw your liquidity, the difference compared to holding simply becomes permanent.

Is there an Impermanent Loss calculator?
For 50/50 pools, the formula in this article is all you need. For concentrated liquidity, the most reliable approach is to compare the position's actual value with the hold value.

Conclusion

Impermanent Loss is the cost of the pool's automatic rebalancing. It isn't a loss relative to what you deposited, but relative to the alternative of holding the tokens. A position is only worth it when the fees earned outweigh the IL.

That's why looking only at fees, or only at IL, gives you an incomplete picture. What matters is comparing the pool's total result with holding.