Guide

Impermanent loss

Impermanent loss is the difference in value between providing two tokens to a liquidity pool and simply holding them. It appears when the tokens prices diverge, and it reverses if they return to their entry ratio.

A worked example

Suppose you deposit 1 ETH (at $100) and 100 USDC, a $200 position split 50/50. If ETH goes 4x to $400, arbitrageurs rebalance the pool and you are left with about 0.5 ETH and 200 USDC, worth $400. If you had simply held the two tokens, you would have $500. That $100 gap (20%) is the impermanent loss. The trading fees you earn while in the pool work against that gap.

Price move vs impermanent loss

Try your own numbers in the impermanent loss calculator.

The formula

For a 50/50 constant-product pool, with p the price ratio of the two assets at exit versus entry, the value ratio is 2*sqrt(p) / (1 + p), and impermanent loss is that minus 1. The loss is symmetric: a token that halves hurts as much as one that doubles.

How to reduce it

• Prefer stablecoin or correlated pairs, which diverge less. See the liquidity pool basics.
• Use deep, high-volume pools so the fees are meaningful.
• Remember that concentrated liquidity earns more fees but increases impermanent loss and needs active management.

How Pool Party helps

Concentrated liquidity is where most impermanent loss is felt, because positions need constant rebalancing. Pool Party automates that management on Base, self-custodially, so your funds stay in your wallet until they enter a strategy contract you can verify on BaseScan.

Frequently asked questions

What is impermanent loss?

Impermanent loss is the difference in value between providing two tokens to a liquidity pool and simply holding them. It appears when the tokens prices diverge and reverses if they return to their entry ratio. It is unrealized until you withdraw.

What is the formula for impermanent loss?

For a 50/50 pool, with p being the price ratio of the two assets at exit versus entry, the value ratio is 2*sqrt(p)/(1+p), and impermanent loss is that minus 1. A 2x move gives about 5.7%, a 4x move about 20%.

How do you avoid impermanent loss?

You reduce it by choosing stablecoin or correlated pairs, using deep pools, and earning enough trading fees to offset it. You cannot fully avoid it in a volatile pair, but fees and rewards can make the net result positive.

Why is it called impermanent loss?

Because it is unrealized while you stay in the pool. If the two prices return to their entry ratio, the loss disappears. It only becomes permanent if you withdraw while the prices have diverged.

Which liquidity pair has the least impermanent loss?

Stablecoin pairs such as USDC/USDT have the least, because their prices barely diverge. Correlated assets come next. The more two token prices move apart, the larger the impermanent loss.