What is impermanent loss?

Impermanent loss is the price-driven shortfall of a position in a liquidity pool relative to holding its original assets outside the pool. The benchmark is what those starting tokens would be worth now, rather than the dollar amount originally deposited.

As trades move a pool’s price, its token composition changes. Uniswap’s v2 returns explanation shows why a position can increase in dollar value while falling behind the holding alternative. Trading fees may offset some or all of the shortfall, but that outcome is not assured.

Example

Take a hypothetical full-range constant-product pool starting with equal-value assets: 1 ETH priced at $1,000 and 1,000 stable tokens priced at $1 each. If ETH rises to $2,000 and the pool adjusts, the position contains approximately 0.7071 ETH and 1,414.21 stable tokens, worth $2,828.43 in total. Keeping the original assets would be worth $3,000. The $171.57 shortfall is about 5.72% relative to holding. The calculation excludes fees and transaction costs.

The position still exceeds its initial $2,000 value. “Impermanent” does not promise that the gap will close. The same calculation cannot be applied unchanged to a narrow concentrated-liquidity position. A stablecoin losing its peg or a contract exploit introduces separate risks.

Our guide to providing liquidity connects range selection to changing token exposure and shows how to record fees and costs separately.