Impermanent loss is the difference in value between holding tokens in a liquidity pool versus holding those same tokens in a wallet. When prices shift after you deposit, you end up with less total value than you would have by simply holding. The loss is called “impermanent” because it theoretically disappears if prices return to the original ratio. In practice, that rarely happens for volatile pairs.
How impermanent loss works
AMMs like Uniswap use a constant product formula: x multiplied by y equals k. If you deposit ETH and USDC into a pool in equal value, the pool must maintain a constant product of those two amounts. When ETH’s price rises on external markets, arbitrageurs buy ETH from the pool because it is cheaper there, which reduces ETH in the pool and increases USDC. When you withdraw, you receive fewer ETH and more USDC than you deposited. Because ETH went up, that is a worse outcome than holding your original tokens.
The loss scales with the size of the price divergence. A 25% move between the two assets causes roughly 0.6% impermanent loss. A 100% move (one asset doubles) causes about 5.7%. A 400% move causes approximately 20%. These figures assume entry and exit at the diverged prices with no fee income.
What this means for traders
The key question is whether fee income exceeds the impermanent loss. Stablecoin pairs (USDC/USDT) have near-zero price divergence, so impermanent loss is negligible and fee income is roughly pure yield. Volatile pairs earn higher fees but carry real impermanent loss risk during large moves.
The danger is asymmetric appreciation. If you pair ETH with a token that gains 10x while ETH holds steady, the loss is severe. Pairs where both tokens move together, like ETH/stETH or BTC/WBTC, have much lower impermanent loss because they rarely diverge significantly. Uniswap v3 concentrated liquidity amplifies both fee income and impermanent loss: you earn more fees for the same deployed capital, but step outside your chosen price range and you’re fully exposed to the depreciating asset.
See also: yield farming in DeFi and DeFi lending protocols.
A concrete example
You deposit 1 ETH and 3,000 USDC into a Uniswap pool when ETH is at $3,000. ETH rises to $4,500. The pool rebalanced automatically during that move. When you withdraw, you receive roughly 0.82 ETH and $3,674 USDC, a total value of $7,374. Had you held the original 1 ETH and $3,000 USDC, you would have $7,500. The $126 gap is impermanent loss, about 1.7%. If the pool earned $200 in fees during that period, you came out ahead. If it earned $50, you underperformed simply holding.
Frequently asked questions
Is impermanent loss actually permanent?
The moment you withdraw from the pool, any impermanent loss locks in and becomes real. The name refers to the theoretical scenario where prices return to the original ratio before you exit. For volatile pairs, this rarely happens.
Which pairs have the lowest impermanent loss?
Stablecoin pairs (USDC/USDT, DAI/USDC) have near-zero divergence. Correlated pairs like ETH/stETH or BTC/WBTC move together and rarely diverge enough to cause meaningful loss. The highest risk is pairing an established asset with a new volatile token.
Does Uniswap v3 increase or decrease impermanent loss?
It increases the potential loss relative to capital deployed, because concentrated liquidity means your position reacts more sharply to price changes within your range. The trade-off is higher fee income, which often offsets the additional IL on liquid, high-volume pairs.
