The problem explained simply
You deposit $5,000 of ETH and $5,000 of USDC into a Uniswap pool. Total: $10,000. A month later, ETH has doubled in price. You withdraw. Your position is now worth $14,142 — which sounds great until you realize that if you had just held the ETH and USDC without providing liquidity, you'd have $15,000.
That $858 difference is impermanent loss. You still made money (your $10,000 became $14,142), but you made less than doing nothing. The pool's rebalancing mechanism cost you potential gains.
Why it happens
AMM pools (like Uniswap's) use a formula to maintain a balanced ratio of tokens. When the price of one token changes, the pool automatically rebalances — selling the appreciating token and buying the depreciating one.
If ETH goes up, the pool sells some of your ETH for USDC. You end up with less ETH than you deposited and more USDC. The rebalancing always works against you compared to simply holding.
The math
For a standard 50/50 AMM pool, impermanent loss depends on how much the price ratio changes:
- 1.25× price change → 0.6% loss vs holding
- 1.5× price change → 2.0% loss
- 2× price change → 5.7% loss
- 3× price change → 13.4% loss
- 5× price change → 25.5% loss
These percentages look small individually, but remember — this is loss compared to holding, not absolute loss. If your pool earns 0.5% in fees per month but suffers 5.7% impermanent loss from a 2× price move, you're net negative for the period.
Why it's called "impermanent"
If the price ratio returns to the exact level it was when you deposited, the impermanent loss disappears. Your position goes back to being equivalent to holding.
The problem: in crypto, prices rarely return to exactly where they were. A token that doubles might never come back to its original price. Or it might — two years later. The loss is "impermanent" in theory but very often permanent in practice.
How to mitigate it
- Use stablecoin pairs. USDC/USDT pools have near-zero impermanent loss because both tokens stay around $1.
- Choose correlated assets. ETH/stETH or WBTC/BTC pools where both assets move together.
- Factor IL into your yield calculation. Don't look at APY alone. Calculate net return after estimated IL.
- Use concentrated liquidity (Uniswap V3). Higher fee income per capital, but also higher IL if price moves outside your range.
- Don't LP during high volatility. If you expect a big price move, withdraw first and re-enter after it settles.
Why this matters for your learning path
Impermanent loss is one of the most important concepts in DeFi, and it only makes sense if you deeply understand how price movements work. Practicing with trading pairs on Korvex — watching how ETH/USDT moves, understanding the relationship between assets — gives you the intuition you need before putting capital into liquidity pools.