Impermanent loss
Impermanent loss explained — how price moves reshape your LP position, how to quantify the impact, and when fees can offset it.
Why IL happens
AMMs price assets by pool ratios rather than order books. When price moves on the market, arbitrage traders push the pool back to fair value by adding the cheaper token and removing the more expensive one. In a constant-product AMM (like most v2 pools), the pool keeps the product x*y = k constant.
As an LP, you end up holding more of the token that went down (relative) and less of the one that went up, compared to simple holding. That’s IL.
Example
Imagine you want to provide liquidity into the TON/USDt pool, and an initial prices are: 1 TON = 10 USDt (i. e. $10), 1 USDt = $1.
Let’s say the pool reserves 100 TON and 1,000 USDt (each side worth $1,000).
Remember the constant product formula? x*y = k = 100 x 1,000 = 100,000
You decide to add liquidity: 10 TON ($100) + 100 USDt ($100) = $200 Your pool share ≈ 10%
Consider price change: TON pumps 4× vs USDt. New price: 1 TON = 40 USDt (=$40)
Pool must rebalance to the new ratio with k:
Let new reserves be x TON and y USDt, with y =40 x and x ⋅ y = 100,000
x ⋅ 40x=100,000 ⇒ x = 50, y = 2,000
New pool: 50 TON and 2,000 USDt
You decide to withdraw your 10% share:
You get 5 TON and 200 USDt
Value at new price: 5 × $40 + 200 × $1=$200 + $200 = $400
Compare to holding strategy:
If you had simply held 10 TON + 100 USDt: 10 × $40 + 100 × $1 = $400 + $100 = $500
Impermanent loss = $500 − $400 = $100 (−20%) relative to a holding strategy.
🔎 Note the pattern: as TON outperforms USDt, the pool tilts you away from TON and toward USDt — this is the essence of IL. IL depends on price ratio, not which side you added: if TON dumps vs USDt, you’ll end up holding more TON and less USDt than a holder — still IL.
Quick Reference Table
Below are common IL magnitudes (absolute %)
Price move
≈ IL
1.25×
~0.6%
1.5×
~2.0%
1.75×
~3.8%
2×
~5.7%
3×
~13.4%
4×
~20.0%
5×
~25.5%
Fees vs. IL
Swap fees (and possible farming incentives) accrue to LPs as trades happen.
If fee revenue ≥ IL, your net PnL can be positive.
Deeper and busier pools (with healthy volume) improve the odds of fees offsetting IL — but nothing is guaranteed.
Common Misconceptions
“IL is a permanent loss.” → False. It’s impermanent until you withdraw; if prices revert, IL can shrink.
“Fees always cover IL.” → Not always. It depends on volume, fee rate, and how far prices move.
“Equal-value deposits eliminate IL.” → No. IL depends on price changes after you deposit, not how you enter.
Last updated