Impermanent Loss
In one sentence
Impermanent loss is the difference between holding two assets in your wallet and providing them as liquidity to an AMM. It becomes a realized loss only when you withdraw and is worse for more volatile pairs.
What it actually means
When you provide liquidity to a constant-product AMM (Uniswap V2, V3 in range, Curve, Balancer with weights), the pool rebalances your position automatically as the price moves. You end up holding less of the asset that went up and more of the asset that went down compared to simply hodling. The shortfall versus the "just hold both" baseline is called impermanent loss.
It is "impermanent" because if the price ratio returns to what it was when you deposited, the loss disappears. It only becomes realized when you withdraw with a different price ratio.
How it is calculated
For a standard 50/50 constant-product pool, the formula depends only on the price ratio change:
- 1.25x price move: about 0.6% impermanent loss.
- 1.5x price move: about 2.0% impermanent loss.
- 2x price move: about 5.7% impermanent loss.
- 4x price move: about 20% impermanent loss.
- 5x price move: about 25.5% impermanent loss.
Why it matters to you
LPs earn trading fees, but those fees have to outweigh impermanent loss for the position to be profitable. On stable-stable pairs (USDC/USDT) impermanent loss is tiny and fees usually dominate. On volatile pairs (ETH/altcoin) impermanent loss can dwarf the fees, especially during trending markets.
On Uniswap V3, impermanent loss is amplified when price moves within your concentrated range, but you also earn many times more fees per dollar. Out of range, your position behaves like a 100% holding of the "weaker" asset — and stops earning fees.
Real example
You deposit $10,000 in a 50/50 ETH/USDC pool when ETH is at $2,000 (so 2.5 ETH + $5,000 USDC). ETH moves to $4,000 (2x). The pool rebalances: you now hold about 1.77 ETH + $7,071 USDC = $14,142 total. If you had just held the original 2.5 ETH + $5,000, you would have $15,000. Impermanent loss = $858 / $15,000 ≈ 5.7%, before fees.
Concentrated liquidity changes the math
Uniswap V3 lets you choose a price range for your liquidity. Inside the range, you are exposed to amplified impermanent loss (because effectively you provide higher concentration) but you earn proportionally more fees. Outside the range, your position becomes 100% the underperforming asset and stops accruing fees entirely. The narrower the range, the bigger the leverage on both sides of this trade-off. A "passive" V3 LP that goes out of range is essentially a directional bet on the asset that is no longer in the basket.
Stable-stable vs volatile pairs
On stable-stable pairs like USDC/USDT, the price ratio rarely moves outside 0.999-1.001, so impermanent loss is in single basis points and fees usually dominate. On volatile pairs like ETH/PEPE, the ratio can swing 5x or more, producing IL in the 25%+ range. The "good LP" rule of thumb: the more correlated and stable the pair, the more likely fees outpace IL. The more volatile and uncorrelated, the more LP becomes a sophisticated trade rather than passive yield.
How Otomato monitors it
For Uniswap V3 positions, Otomato alerts you when your range is breached (which freezes fee accrual and locks in directional exposure) and when implied loss versus a hold-the-pair baseline crosses a threshold. You decide whether to rebalance, exit, or wait. You do not wake up to find your LP has been one-sided for a week.
Related terms
Monitor this in your portfolio
Otomato detects your positions automatically and alerts you only when something material changes. No setup, no signatures.
App Store