Understanding Impermanent Loss
How impermanent loss works and its impact on LP positions.
How impermanent loss works and its impact on LP positions.
Impermanent Loss (IL) occurs when the price ratio between two assets in a liquidity pool changes compared to when you deposited. It's called "impermanent" because the loss only becomes permanent when you withdraw.
When you provide liquidity to a pool, you deposit two assets (e.g., WETH + USDC). If the price of one asset changes relative to the other, the automated market maker rebalances your position, potentially leaving you with less total value than if you'd simply held the assets separately.
You deposit $1,000 total: $500 in WETH (1 ETH @ $500) + $500 in USDC
Pool ratio: 1 ETH = 500 USDC
ETH price doubles to $1,000
Pool automatically rebalances to maintain 50/50 value ratio
Pool now has: 0.707 ETH (~$707) + ~707 USDC
Total value: ~$1,414
If you'd just held: 1 ETH ($1,000) + 500 USDC = $1,500
Impermanent Loss: $1,500 - $1,414 = $86 (5.7% IL)
IL is higher when:
IL is lower when:
The Trade-off: While IL reduces returns compared to holding, you earn trading fees and incentives that can offset or exceed the IL.
| Scenario | IL Impact | Fee Income | Net Result |
|---|---|---|---|
| Stable prices | Minimal | Accumulates | ✅ Profitable |
| Moderate volatility | 2-5% | Strong fees | ✅ Usually profitable |
| Extreme price moves | 10-20%+ | May not offset | ⚠️ Potential loss |
Metalos tracks IL in real-time on your portfolio dashboard:
Use the AI chat agent: "How much impermanent loss am I experiencing?" to get real-time analysis of your LP positions.
IL is acceptable when:
Estimate potential IL before depositing:
Learn the basics of liquidity provision
Lower IL strategy with stablecoin pair
Higher IL strategy with volatile pair
Complete guide to Metalos risk assessment