Impermanent loss explained in brief: when you deposit two tokens into a liquidity pool, the automated market maker rebalances your holdings as prices shift. You end up with less value than if you had simply held both tokens in your wallet. That shortfall is impermanent loss (IL), and it grows with the size of the price move.
- IL is not a fee or a hack: it is a mathematical side-effect of how AMMs like Uniswap and PancakeSwap rebalance pools.
- A 2x price move in one token causes roughly 5.7% IL; a 5x move causes about 25.5% IL. Source: Uniswap v2 white paper mathematics, verified by Bancor research (2021).
- IL only locks in when you withdraw; if prices revert, the loss shrinks or disappears.
- Trading fees and liquidity mining rewards can offset IL, but they do not always cover it.
- Indian LPs face an extra sting: 30% VDA tax on any profit and 1% TDS on every redemption above Rs 50,000, per the Finance Act 2022. Read the full breakdown in our crypto tax guide for India.
Impermanent Loss Explained: Why LP Value Lags Simple Holding
Every AMM liquidity pool runs on a constant-product formula: x x y = k. The pool keeps the product of both token quantities constant. When traders buy one token, the pool automatically sells some of the other, pushing prices back toward equilibrium.
That rebalancing is the root cause of impermanent loss explained in mechanical terms. As one token appreciates, the pool sells it to maintain the formula. You end up holding more of the cheaper token and less of the one that ran up. A simple holder keeps the full upside; an LP shares it with the pool.
Think of it this way: you deposit ETH and USDT in equal INR value. ETH doubles. A holder’s ETH bag is now worth 2x. Your LP position rebalanced throughout the move, so you now hold proportionally less ETH and more USDT. Your position grew, but not as much as simply holding did. That shortfall is IL.
A Worked Example: One Token Doubles
Say you deposit Rs 1,00,000 worth of liquidity into an ETH/USDT pool on a DEX accessible from India (like through Mudrex or a WazirX Web3 wallet). You put in 0.5 ETH at Rs 1,00,000 per ETH and Rs 50,000 in USDT, for a total of Rs 1,00,000.
ETH price doubles to Rs 2,00,000. The AMM rebalances. You now effectively hold roughly 0.354 ETH and Rs 70,700 in USDT. At new prices, your pool position is worth about Rs 1,41,400.
If you had simply held: 0.5 ETH at Rs 2,00,000 = Rs 1,00,000 in ETH, plus Rs 50,000 USDT = Rs 1,50,000 total.
The difference: Rs 1,50,000 minus Rs 1,41,400 = Rs 8,600 in impermanent loss, or roughly 5.7% of your hold value. You still made money in absolute terms, but you left Rs 8,600 on the table versus simply holding. Whether the pool’s trading fees covered that gap is the real question every LP must ask.
The IL Table Every LP Should Know
This is the most cited reference for anyone running an impermanent loss calculator manually. The figures below assume a standard 50/50 AMM pool using the constant-product formula. They represent IL as a percentage of the hold strategy’s value.
| Price Change (one token vs. the other) | Impermanent Loss |
|---|---|
| 1.25x (25% move) | 0.6% |
| 1.5x (50% move) | 2.0% |
| 1.75x (75% move) | 3.8% |
| 2x (100% move) | 5.7% |
| 3x (200% move) | 13.4% |
| 4x (300% move) | 20.0% |
| 5x (400% move) | 25.5% |
Source: Uniswap v2 white paper mathematics, widely verified by on-chain analytics platforms including Bancor research (2021). These percentages apply symmetrically whether one token goes up or down by that ratio.
A 5x move wiping out 25.5% of your hold value is not a fringe scenario in crypto. Many altcoins listed on Indian platforms like CoinDCX have seen 5x swings within a single bull-market quarter. If you are wondering whether crypto prices will recover after a correction, know that a recovery does not necessarily mean your LP position recovers fully either.
Impermanent Loss Explained: How to Avoid or Minimise It
You cannot eliminate IL in a standard AMM, but you can pick pools where it is structurally smaller.
Stablecoin-to-Stablecoin Pools
Pools like USDT/USDC or DAI/USDC almost never diverge in price. IL is near zero. Yields are lower (often 1-5% APY), but the math is clean. For Indian investors, these are the closest thing to a safe DeFi yield, though smart-contract risk and stablecoin de-peg risk still exist.
Correlated Asset Pools
ETH/stETH or BTC/WBTC pools pair assets that tend to move together. If both tokens rise and fall roughly in tandem, the price ratio barely shifts, keeping impermanent loss low. Some protocols like Curve Finance are specifically designed for these correlated pairs.
Concentrated Liquidity Ranges
Uniswap v3 lets you set a price range for your liquidity. You earn more fees within that range, but if the price exits your range, you are 100% in one token and earning zero fees. It is a sharper tool that requires active management. Watch out for major token unlock events in June 2026 that could spike volatility and push prices outside your range.
IL Protection Programs
Some protocols (Bancor historically offered this; newer AI-driven yield optimizers are experimenting with it too) offer IL insurance after you have held a position for a minimum period. These are worth checking before you commit capital. For context on how AI is reshaping DeFi tooling, see our piece on AI agents in crypto.
The honest bottom line: if you are farming a volatile token pair chasing 200% APY, the IL alone can eat 20-25% of your position in a single price swing. Fee income rarely covers that. Stick to pairs where you understand the price relationship and size your LP positions accordingly.
Frequently Asked Questions
What is impermanent loss?
Impermanent loss is the difference in value between holding two tokens in your wallet versus depositing them into an AMM liquidity pool. The pool’s rebalancing mechanism means you end up with less of the token that appreciated. It is called impermanent because if prices return to their original ratio, the loss disappears. It becomes permanent the moment you withdraw at an unfavorable ratio.
Why does providing liquidity cause losses?
AMMs use a constant-product formula (x x y = k) to price assets. Every time a trader buys one token from the pool, the pool sells some of the other to maintain the formula. This continuous rebalancing means LPs always sell into strength and buy into weakness, which is the opposite of what a long-term holder does. The cumulative effect of that rebalancing versus holding is IL.
How big is IL for a 2x price move?
A 2x price move in one token relative to the other causes approximately 5.7% impermanent loss versus simply holding both tokens. On a Rs 1,00,000 position, that is roughly Rs 5,700 left on the table. Trading fees may offset this, but in low-volume pools they often do not. Always model the fee APY against the expected IL before entering a position.
When does impermanent loss become permanent?
IL becomes a real, locked-in loss the moment you withdraw your liquidity at a price ratio different from when you deposited. If you deposit when ETH is at Rs 1,00,000 and withdraw when it is at Rs 2,00,000, the 5.7% IL crystallises. If ETH drops back to Rs 1,00,000 before you withdraw, the IL shrinks back to zero. Timing your exit matters as much as your entry.
Which pools minimise impermanent loss for Indian investors?
Stablecoin pairs (USDT/USDC, DAI/USDT) have near-zero IL because the price ratio barely moves. Correlated asset pairs (ETH/stETH, BTC/WBTC) also keep IL low. Avoid high-volatility altcoin pairs if IL is your main concern. For Indian investors using platforms like Mudrex or CoinDCX’s DeFi features, stablecoin pools are the most predictable starting point, though yields will be modest. Remember that the 30% VDA tax and 1% TDS under the Finance Act 2022 apply regardless of which pool you choose.
This is not financial advice. Data as of July 2026. Crypto assets are highly volatile and unregulated in India. Returns are not guaranteed and you may lose some or all of your capital. Last updated: July 2026. Reviewed by the CryptoWire editorial team.
