Impermanent Loss

What Is Impermanent Loss (ImpermanentLoss)?

Impermanent loss refers to the profit gap caused by price divergence when providing liquidity as a market maker.

It occurs when you deposit two assets into a liquidity pool for market making, and changes in market prices trigger passive rebalancing within the pool. When you withdraw your assets, you may find that the total value is less than if you had simply held both assets without participating in the pool. Since this difference only becomes permanent upon withdrawal, it’s called “impermanent” loss.

An automated market maker (AMM) uses a fixed formula to facilitate trading within the pool, instead of relying on traditional order books. Assets in the pool are usually split roughly 50-50 by value. As prices change, the AMM mechanism results in you holding more of the depreciating asset and less of the appreciating one.

In common 50-50 pools, if an asset’s price doubles, impermanent loss is about 5.7%. If the price triples, the loss is around 13.4%. These percentages reflect the difference relative to simply holding without market making and do not account for any offset from earned trading fees.

Why Is Understanding Impermanent Loss Important?

It directly impacts the true returns of liquidity provision.

Many participants focus only on annualized yields or trading fees and overlook value reductions caused by price divergence. If fees aren’t high enough or volatility is excessive, liquidity providers may underperform simply holding their assets. Understanding impermanent loss is key to selecting the right pools and accurately calculating profits and losses.

It influences strategy selection. Pools with highly correlated assets or stablecoin pairs experience much lower impermanent loss, while volatile pairs incur higher losses and require more active management and hedging. Beginners should avoid treating “high APY” as guaranteed returns—always evaluate expected price movements and holding periods first.

It’s closely tied to capital safety. Market making is not equivalent to making a deposit; both returns and risks fluctuate with the market. Knowing when to withdraw or how to set price ranges can significantly reduce loss probability.

How Does Impermanent Loss Work?

Impermanent loss results from the pool’s passive rebalancing mechanism.

In a 50-50 AMM, the pool is designed to keep your holdings balanced by value. When one side appreciates, arbitrageurs buy the appreciating asset from your pool, leaving you with more of the depreciating asset; if prices fall, the process reverses. Compared to just holding both assets, you end up with less of the asset that went up in value and more of the one that went down.

For example, consider an ETH/USDT pool initially funded with equal values of each asset. If ETH doubles in price, upon withdrawal you’ll have fewer ETH and more USDT, with a total value about 5.7% less than simply holding both assets outside the pool. If ETH triples, the loss rises to about 13.4%. A 50% price drop would result in an identical magnitude of loss but in the opposite direction.

Concentrated liquidity means allocating funds within a specific price range. Within this range, fee earnings increase, but if prices move outside, your holdings concentrate in one asset, increasing exposure. The narrower your range and the more actively you manage it, the more closely you must monitor or hedge potential impermanent loss.

Fees can partially offset these losses. In highly active pools with high fee rates, cumulative fees may cover or exceed impermanent loss. Whether this occurs depends on volatility patterns, duration of participation, and fee levels.

Where Does Impermanent Loss Commonly Occur in Crypto?

Impermanent loss most often appears in market making, yield farming, and cross-chain pools.

On Gate’s liquidity mining platform, choosing volatile pairs like ETH/USDT increases exposure to impermanent loss during strong uptrends or downtrends. For example, during a week when ETH surges, liquidity providers will passively swap out ETH for USDT and may find their returns lag behind simply holding ETH when they withdraw.

In stablecoin pools such as USDT/USDC—where both assets are pegged to $1—impermanent loss is minimal. Providers primarily earn from fees, with risk arising mainly from de-pegging events or temporary premiums.

In pools for trending meme coins or small-cap tokens, prices are highly volatile and trading is frequent. While fees may be high, sharp price moves can cause significant impermanent loss—especially for inexperienced participants.

For cross-chain or restaking-related pools where one side is a yield-bearing derivative (such as a staked token certificate) and the other is spot or a stablecoin, changing correlations can make impermanent loss combine “slow” and “fast” moving variables—requiring even finer-grained range management.

How Can You Reduce Impermanent Loss?

Step 1: Choose your pool wisely. Prioritize pairs with high correlation or stablecoins (e.g., USDT/USDC or WBTC/BTC derivatives), as their price divergence—and thus impermanent loss—is more controllable.

Step 2: Set appropriate price ranges. Use concentrated liquidity to allocate funds where trading is most likely. Avoid overly narrow ranges—leave room for price movement and consider triggers that automatically withdraw or adjust your position if prices move too far.

Step 3: Use hedging. For example, if providing liquidity to an ETH/USDT pool, consider shorting a small amount of ETH with perpetual contracts to offset directional exposure. The goal is to balance fee income with hedging costs for more stable net returns.

Step 4: Time your entry. Avoid adding liquidity during periods of high volatility or major news events; instead, provide liquidity during stable yet active trading periods to maximize fee coverage.

Step 5: Keep detailed records. Track fee rates, trading volume, time spent out-of-range, and degree of price divergence. If weekly annualized fees fall below expectations or prices near your range boundaries, reduce your position or shift your range accordingly.

Step 6: Diversify and set stop-losses. Spread funds across multiple pools with high correlation; set maximum drawdown thresholds and exit if reached to prevent small losses from compounding.

Recent Trends and Data on Impermanent Loss

This year’s main areas of focus are volatility management, fee structures, and concentrated liquidity strategies.

In the first half of 2025, leading DEXs increasingly adopted concentrated liquidity models. Stablecoin pairs accounted for 40–50% of TVL, showing that capital is flowing into pools with lower impermanent loss due to steady trading volumes and more predictable fee recovery.

As of Q3 2025, standard estimates for mainstream 50-50 pools indicate impermanent loss of about 5.7% when prices double and roughly 13.4% when they triple. In high-volume pools with a 0.3% fee rate, weekly annualized fees often reach double digits; however, if a single-sided trend emerges, fee coverage declines significantly.

From 2024 through this year, volatility in ETH and BTC has rebounded periodically—prompting providers to more frequently rebalance ranges or use small hedges. Over the past year, platforms have iterated on market making tools—offering more flexible range templates and automated strategies—to boost fee income and minimize out-of-range time.

On Gate’s liquidity mining platform in H1 2025, stablecoin pools typically yielded low double-digit annual returns while volatile pairs saw a much wider range—depending on weekly trends and fee tiers. The growing trend is that liquidity providers now assess both “annualized fees” and “expected price paths” rather than focusing on just one metric.

What Is the Difference Between Impermanent Loss and Slippage?

They refer to different aspects: one occurs during liquidity provision over time; the other happens instantly during trade execution.

Impermanent loss describes the relative yield difference caused by price divergence while providing liquidity over time—it is realized when you withdraw your funds from the pool. Slippage refers to the difference between your executed trade price and expected price, usually caused by insufficient depth or large orders impacting the order book.

Impermanent loss can be partially offset by fees earned over time; slippage is a one-off cost incurred immediately upon trade execution. Liquidity providers evaluate impermanent loss; traders manage slippage using deeper pools or limit orders.

Glossary

• Impermanent Loss: The potential loss faced by liquidity providers due to changes in asset prices—the greater the divergence, the higher the loss.
• Liquidity Pool: A pair of tokens deposited by users into a DeFi protocol for trading; providers earn transaction fees.
• Automated Market Maker (AMM): A mechanism that uses mathematical formulas (such as x*y=k) to automatically set token prices without an order book.
• Slippage: The difference between expected and executed trade prices—lower liquidity leads to higher slippage.
• Yield Farming: A DeFi strategy where users earn additional token rewards by providing liquidity or staking tokens.

FAQ

If I experience impermanent loss in liquidity mining, can I recover my money?

Whether you can recover depends on future price movements and accumulated fee income. If asset prices return to their initial range, impermanent loss will disappear automatically; if prices continue to diverge, losses may not be fully recouped. However, high fee yields (such as with stablecoin pairs) may cover losses—choosing high-fee pools can provide an income buffer.

Is there really no impermanent loss in stablecoin liquidity mining?

Impermanent loss for stablecoin pairs (like USDC-USDT) is extremely low but not zero. Since both are pegged close to $1 with little price fluctuation, impermanent loss is almost negligible—making these pairs ideal entry points for beginners thanks to relatively stable returns and low risk.

How do I choose trading pairs to avoid impermanent loss when providing liquidity?

Choosing low-volatility pairs is crucial. Stablecoin pairs (e.g., USDC-USDT) carry virtually no risk; blue-chip pairs (ETH-BTC) have moderate volatility; new coin pairings are extremely risky. On major platforms like Gate, start with stablecoin pairs to gain experience before trying highly correlated pairs (such as ETH-stETH)—this allows you to earn yield while managing risk effectively.

Is impermanent loss settled all at once when I withdraw my liquidity?

Impermanent loss accumulates continuously—not only at withdrawal. Any time asset prices diverge from your starting point, your LP share value declines in real time. When you withdraw, any loss is already “locked in,” as assets are returned according to current market ratios—withdrawal timing does not affect the amount lost.

How can I quickly assess whether a liquidity pool is worth joining?

Assess three key factors: pair volatility (the lower the better), annualized returns (from trading fees), and pool depth (deeper pools mean lower slippage). A sound decision metric is: annualized return > historical impermanent loss—only then will net yield be positive. On Gate’s DeFi section, review historical data and earnings stats for each pool to make an informed choice.