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Impermanent Loss Explained: A Practical Guide

A clear, data-driven guide to impermanent loss explained.

Where the loss comes from

In a constant product pool, arbitrageurs rebalance reserves whenever external price moves. LPs end up holding more of the asset that fell and less of the one that rose, compared with simply holding both.

The formula

For a price ratio change r, IL = 2√r ÷ (1 + r) − 1. A 2× move gives −5.72 percent, a 3× move −13.4 percent, a 5× move −25.5 percent. The loss is symmetric: a 50 percent drop (r = 0.5) also costs 5.72 percent.

Why impermanent

If prices return to the entry ratio, the loss disappears. It becomes permanent when you withdraw at a different ratio, which is why fees must outpace it over your holding period.

Fee breakeven

Breakeven days = IL ÷ fee APR × 365. A 5.72 percent loss with a 30 percent fee APR takes about 70 days of fees to recover.

Hedging approaches

LPs hedge with short perps on the volatile asset, use options to cap downside, or choose correlated pairs like stETH/ETH where r stays near 1.

By the numbers

For Impermanent Loss Explained, the reference figures are topic of Impermanent Loss Explained, level of Intermediate, updated of 2026. The comparison table below lines up price change, r, il — +25%: 1.25 / -0.6%; +100%: 2 / -5.7%; +200%: 3 / -13.4%; +400%: 5 / -25.5%; -50%: 0.5 / -5.7%.

Modeling Impermanent Loss Explained with the AMM Impermanent Loss Calculator

The AMM Impermanent Loss Calculator takes three inputs — Price ratio change (x), Deposit ($), Fee APR (%). IL = 2√r ÷ (1 + r) − 1. With its default inputs (Price ratio change (x) = 2; Deposit ($) = 10000; Fee APR (%) = 20) it returns -5.72 %; swap in the figures from Impermanent Loss Explained above to reproduce the scenario yourself.

Modeling Impermanent Loss Explained with the LP Fee Breakeven Vs IL Days Calculator

The LP Fee Breakeven Vs IL Days Calculator takes three inputs — IL (%), Fee APR (%), Deposit ($). Breakeven days = IL ÷ fee APR × 365. With its default inputs (IL (%) = 5.7; Fee APR (%) = 30; Deposit ($) = 10000) it returns 69.35 days; swap in the figures from Impermanent Loss Explained above to reproduce the scenario yourself.

Data Table

For educational and informational purposes only. Not financial, investment, tax or legal advice. Figures are approximate and historical; crypto assets are volatile and you may lose capital. Do your own research.