If you provide liquidity to a decentralized exchange, your biggest hidden risk is often impermanent loss. This calculator helps you estimate how much your LP position could underperform a simple buy-and-hold strategy when price ratios move.
What is impermanent loss?
Impermanent loss (IL) is the difference between:
- what your liquidity position is worth after prices move, and
- what you would have had if you simply held the same assets outside the pool.
It is called “impermanent” because if prices return to where they started, the loss can shrink or disappear. In practice, many LPs withdraw while prices are still displaced, making the loss effectively permanent.
How this calculator works
Core assumptions
- 50/50 pool by value at entry.
- Constant-product AMM mechanics.
- No slippage or gas costs included.
- Fee estimate is user-supplied (optional).
Formula used
Let r = final price / initial price. Then the LP value relative to HODL is:
LP / HODL = (2 * sqrt(r)) / (1 + r)
And impermanent loss is:
IL = (LP / HODL) - 1
IL is usually shown as a negative percentage (for example, -5.72%).
Quick intuition
If one asset in the pair moves sharply, the AMM automatically rebalances your position: you end up with less of the outperforming asset and more of the underperforming asset. That rebalancing is what creates IL compared with simply holding both assets untouched.
| Price move (r) | Approx IL | Interpretation |
|---|---|---|
| 1.25x | -0.62% | Mild price divergence, small IL |
| 1.50x | -2.02% | Moderate move, IL becomes noticeable |
| 2.00x | -5.72% | Large move, fees must be substantial to offset |
| 3.00x | -13.40% | Strong trend, LP can lag HODL significantly |
How to reduce impermanent loss risk
- Choose less volatile pairs: Stablecoin pairs generally experience lower IL than highly speculative pairs.
- Target high real volume: More organic trading volume can generate fees that offset IL.
- Monitor your thesis: If one token is likely to strongly outperform, LP might underperform holding.
- Use concentrated ranges carefully: In concentrated liquidity AMMs, capital efficiency increases, but out-of-range risk and IL dynamics can be harsher.
- Reassess often: LP is not “set and forget,” especially in volatile markets.
When LP can still outperform HODL
Impermanent loss only describes one side of the equation. Total performance includes trading fees (and in some protocols, incentives). LP can beat HODL if fee income is high enough to cover IL and costs.
That is why this calculator includes an optional fee input: you can test whether your estimated earnings close the gap.
Frequently asked questions
Is impermanent loss always negative?
Relative to HODL, yes. IL is zero when prices do not diverge, and negative when they do.
Does IL depend on whether price goes up or down?
The magnitude is symmetric for r and 1/r. A 2x move up has the same IL magnitude as a 50% move down.
Can fees eliminate IL?
Yes, sometimes. If fee earnings exceed the IL amount (plus gas, taxes, and any other costs), your LP outcome can beat passive holding.
Is this calculator valid for every DeFi pool?
No. It is best for standard 50/50 constant-product pools. Weighted pools, stable-swap curves, and concentrated liquidity positions may behave differently.
Final note
Use this as a planning tool, not a guarantee. Real-world LP outcomes depend on volatility, volume quality, fee tier, pool design, rebalancing behavior, and execution costs. Still, understanding IL before depositing liquidity can save you from painful surprises.