What Is Impermanent Loss?
Impermanent loss is the difference between what your tokens are worth inside a liquidity pool and what they would have been worth if you had simply held them. It appears whenever the two tokens in a pool move in price relative to each other, and it grows the further they move apart.
It is not a fee and nobody takes it from you. It is a side effect of how an automated market maker keeps a pool balanced.
Key Takeaways
- Impermanent loss depends only on how far the price ratio between the two tokens has moved, not on which direction.
- A 2x move costs about 5.7% against holding. A 5x move costs about 25.5%. A 10x move costs about 42.5%.
- You can be in profit and still have impermanent loss. It measures what you gave up, not whether you made money.
- Trading fees and farm rewards are what a liquidity provider is paid for carrying it.
- The loss only becomes permanent when you withdraw while the prices are still apart.
Why It Happens
A standard pool holds two tokens at equal value. When one token rises on the open market, traders buy the cheaper one out of the pool until the pool price matches. The pool ends up holding less of the token that went up and more of the one that did not.
As a liquidity provider you own a share of whatever the pool holds. So after a rally you own fewer of the winning token than you deposited. You still gained, just less than a holder did.
The same thing happens in reverse on the way down. The pool buys the falling token all the way to the bottom, so you end up holding more of the loser.
A Worked Example
You deposit 10 SOL and 100,000 of a project token into a pool. SOL is at $100 and the token is at $0.01, so each side is worth $1,000 and your position is worth $2,000.
The token doubles to $0.02 while SOL stays at $100.
If you had held: 10 SOL at $100 plus 100,000 tokens at $0.02 comes to $3,000.
In the pool: arbitrage rebalances your share to roughly 14.14 SOL and 70,711 tokens. Each side is now worth about $1,414, so the position is worth about $2,828.
You are up $828 on your deposit. You are also $172 behind where holding would have put you. That $172, or 5.7%, is the impermanent loss.
How Much You Lose at Each Price Move
The figure depends only on the size of the move between the two tokens.
| Price move between the two tokens | Loss against holding |
|---|---|
| 1.25x | 0.6% |
| 1.5x | 2.0% |
| 2x | 5.7% |
| 3x | 13.4% |
| 4x | 20.0% |
| 5x | 25.5% |
| 10x | 42.5% |
A fall produces the same numbers. A token that halves against its pair costs 5.7%, the same as one that doubles. A token that drops 90% costs 42.5% on top of the price fall itself.
For anyone who wants to check the table, the formula is two times the square root of the price ratio, divided by one plus the price ratio, minus one.
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Why It Is Called Impermanent
If the two prices return to the ratio they had when you deposited, the loss disappears completely. Your share of the pool rebalances back to what you put in.
That is the only sense in which it is impermanent. If you withdraw while the prices are apart, you lock it in. And plenty of token pairs never return to their starting ratio, so treating it as temporary by default is a mistake.
When Fees Cover It
Every swap through the pool pays a fee, and that fee is shared among liquidity providers. Fees are the income side of the trade. Impermanent loss is the cost side.
The comparison is simple. Over the period you were in the pool, did you earn more in fees than you gave up against holding?
A pair with heavy trading volume and a modest price drift usually comes out ahead. A pair that moves 5x in one direction on thin volume usually does not. Volume relative to pool size matters more than the headline fee rate.
How Farm Rewards Change the Maths
This is the reason LP farms exist. A project that wants deep liquidity is asking providers to carry impermanent loss on its behalf, and trading fees alone are often not enough to make that worthwhile on a volatile token.
A farm adds a third number to the equation. You stake your LP tokens, your liquidity stays in the DEX pool earning fees, and you receive a separate reward token on top.
So the real test becomes: fees plus farm rewards, against impermanent loss. On StakePoint farms the APR is shown in USD, calculated from the reward token price and the LP token price, which makes that comparison direct. Against the table above, a farm paying well over 6% for the period comfortably covers a 2x move. Nothing reasonable covers a 10x move, which is why pair selection still matters.
For projects, this is the practical argument for creating a farm. You are paying people to stay in the pool through the moves that would otherwise push them out.
Which Pairs Carry the Most Risk
Stable pairs. Two assets that hold the same value barely move against each other, so the loss is close to zero. The return is fees only.
Correlated pairs. Two tokens that tend to rise and fall together drift apart slowly. Moderate risk.
A project token against SOL or USDC. This is the highest risk category and also where most farms are. A new token can move several times over in a week in either direction.
Concentrated liquidity positions. These earn more fees per dollar inside their range and take a proportionally larger loss when the price leaves it. They are also NFT positions rather than fungible LP tokens, so they cannot be staked in a farm.
Locked and Burned Liquidity Still Has It
Worth knowing if you are a project. Locking your LP tokens stops the liquidity from being withdrawn. It does nothing to the pool mechanics. A locked position rebalances exactly like an unlocked one, and so does a burned one.
When a lock expires, what comes back is your share of the pool as it stands that day, not the amounts you deposited. If the token has risen a long way, expect fewer tokens and more of the paired asset.
How to Reduce Impermanent Loss
Choose pairs you expect to move together, or pairs with enough volume to pay for the drift.
Compare fees plus farm rewards against the table above before depositing, not after.
Think in longer periods. Fees and rewards accumulate with time, while the loss depends only on where the price ratio ends up.
Avoid withdrawing at the point of maximum divergence unless your view on the token has changed.
Only provide liquidity with tokens you would be content to hold in either proportion.
Impermanent Loss FAQ
What is impermanent loss in simple terms?
It is the gap between the value of your tokens in a liquidity pool and the value they would have had if you had held them in your wallet. It appears when the two tokens change in price relative to each other.
How much impermanent loss is there at 2x?
About 5.7% against holding. At 3x it is about 13.4%, at 5x about 25.5%, and at 10x about 42.5%. The same figures apply whether the token rises or falls by that multiple.
Can you lose money from impermanent loss?
You can end up with less than you deposited if one token falls sharply, because the pool keeps buying it as it drops. When a token rises, you normally still profit, just by less than a holder would.
Does impermanent loss go away?
Only if the two prices return to the ratio they had when you deposited. If you withdraw before that, the loss is realised and permanent.
Do farm rewards cancel out impermanent loss?
They can. Farm rewards and trading fees are income, and impermanent loss is a cost. If the income over your holding period is larger than the loss, providing liquidity beat holding.
Do locked LP tokens suffer impermanent loss?
Yes. A lock prevents withdrawal but the position still rebalances inside the pool. The same is true of burned liquidity.
Is there impermanent loss on stablecoin pairs?
Very little, because the two assets stay close to the same price. The trade is that the return comes from fees alone.
*Stake LP tokens and earn a reward token on top of your trading fees: StakePoint LP Farming. For how farms work, see Solana LP Farming on StakePoint.*