Impermanent loss
A liquidity provider’s shortfall against simply holding the tokens, when their prices diverge.
The price of rebalancing
A 50/50 pool keeps the same value in each of its two tokens. When one rises, buyers take it out of the pool in exchange for the other: the liquidity provider ends up with less of the winning token and more of the losing one. Compared with simply holding, they have “sold too early” on the way up and “bought too early” on the way down.
The gap is called impermanent because it cancels out if the price returns to its level at deposit. It depends only on the size of the move, not its direction.
- r
- change in the two tokens’ relative price (2 for a doubling).
ETH doubling
- Deposit: $5,000 of ETH and $5,000 of USDC.
- ETH doubles: r = 2, IL = 2 x 1.4142 / 3 - 1 = -5.72%.
- Holding: 10,000 + 5,000 = $15,000; pool: $14,142.
The pool must have earned more than $858 in fees to beat holding.
Common mistakes
- Comparing the pool’s APR with zero rather than with simply holding both tokens.
Questions and answers
Do stablecoin pools have impermanent loss?
Almost none as long as both tokens hold their peg. The risk becomes one of them losing it.
Notitia newsroom · education, not investment advice.