Guide
How Impermanent Loss Works
Understand impermanent loss conceptually, why relative token price movement matters, and which existing tools can support fee and drawdown scenarios.
Last updated: 2026-06-05
- Practical guide
- Calculator links included
- Estimates, not professional advice
Calculators in this guide
Impermanent loss is a comparison between liquidity pool value and simply holding the tokens.
Simple calculators can support fee, swap, drawdown, and tax scenarios, but cannot fully model protocol-specific DeFi risk.
Practical takeaway
Use impermanent loss as a concept check, then model fees, swaps, drawdowns, and tax assumptions separately with existing calculators.
Impermanent loss compares LP value with holding
Impermanent loss describes the difference between the value of a liquidity pool position and simply holding the tokens, caused by relative price movement between the assets.
Fees can offset some loss, but fee income is not guaranteed and depends on pool volume, fee tiers, liquidity, and protocol rules.
Simple calculators cannot capture all DeFi risk
A DeFi scenario can include smart-contract risk, oracle risk, depeg risk, liquidity changes, reward token volatility, governance changes, and tax treatment.
Use existing calculators for fees, swaps, drawdowns, and tax estimates, then review protocol-specific details separately.
Real-world examples
Compare fee assumptions around a liquidity position.
Check drawdown recovery math for a DeFi token scenario.
Practical scenarios
- A liquidity provider compares fee income with relative token price movement.
- A user reviews depeg and liquidity risk before treating rewards as net return.
Common mistakes
- Assuming fees always offset impermanent loss.
- Ignoring depeg or smart-contract risk.
- Treating a conceptual guide as a pool quote.
Things calculators cannot predict
- No live pool data is used.
- Protocol rules differ.
- Smart-contract, oracle, liquidity, depeg, and governance risks are not fully captured.