How Impermanent Loss Works (With a $1,000 Example)

What Impermanent Loss Actually Is

Impermanent loss (IL) is the difference between what you'd have if you held your tokens versus what you actually have after providing liquidity. It's "impermanent" because it reverses if the price returns to your entry level. In practice, it often becomes permanent.

You don't lose money in the traditional sense — you just make less than you would have by doing nothing. On volatile pairs in a rising market, that difference can be significant.

The $1,000 Example

You deposit $1,000 into an ETH/USDC pool on Orca. At entry, ETH is $2,000.

• You provide: 0.25 ETH + $500 USDC
• Total value: $1,000 ✓

Now ETH doubles to $4,000. You decide to withdraw.

If you had just held: 0.25 ETH is now $1,000 + $500 USDC = $1,500

What you actually have in the pool: The AMM rebalances your position automatically as the price moves. At $4,000 ETH, your position is worth approximately $1,414 — not $1,500.

Impermanent loss: ~$86 (5.7%)

The math behind this: AMMs use the formula x × y = k. As ETH rises, the pool sells your ETH and buys USDC to maintain balance. You end up holding less of the asset that went up.

When Fees Make It Worth It

IL by itself doesn't tell you whether providing liquidity is profitable. You also earned swap fees during that period.

If the pool generates 50% APY in swap fees and you held for a month, you earned roughly 4.2% in fees ($42 on a $1,000 position). Against 5.7% IL, you're net -1.5%.

If the pool generates 80% APY and you held for the same month, fees are ~6.7%. Against 5.7% IL, you're net +1% — profitable even after IL.

IL becomes irrelevant when: - The token pair is highly correlated (e.g. USDC/USDT, ETH/stETH) - The fee tier is high and volume is consistent - The price moves sideways over your holding period

How to Reduce IL Risk

Use Correlated Pairs Stablecoin pairs (USDC/USDT) have near-zero IL because prices don't diverge. LST pairs (ETH/stETH) have very low IL because stETH tracks ETH closely.

Tighten Your Range (Advanced) On Uniswap V3 or Orca, you provide liquidity within a price range. Tighter ranges earn more fees but face more frequent IL when the price moves outside.

Understand What You Own Track your position on DeFiLlama or Debank. Know your entry price and current IL before you exit.

Trade on Orca → (affiliate — we earn a commission at no cost to you)

The Honest Summary

IL is a real cost. On volatile pairs, it frequently wipes out swap fee income. On correlated pairs and high-volume pools, fees more than compensate.

The pairs most exposed to IL are exactly the ones with the highest advertised APY — because protocols need to offer high emissions to attract LPs who would otherwise walk away from the risk.

Before entering any LP position, ask: if this token moves 2x up or down, what does my IL look like? Then ask: do fees cover it?

If you want yield without IL exposure, stablecoin lending on Aave or Fluid is the right starting point.

This is educational content, not financial advice.