Impermanent Loss — the single most important number for an LP
What is Impermanent Loss?
Impermanent Loss (IL) is the loss you take as an LPLPLiquidity Provider — deposits tokens into a pool and earns a share of trading fees.Read the lesson →, compared with simply holding your money in your wallet. It isn't a surprise — it's a known, calculable trade-off, and this lesson will teach you to measure and evaluate it yourself.
A market analogy
Imagine you have apples and pears at the market. You trade some of your apples for pears. The next day the apple price doubles — but you'd already given some away! That "lost profit" is exactly what Impermanent LossImpermanent LossA loss in an LP position caused by price changes relative to holding the assets. Called "impermanent" because it can recover if the price returns to its starting level.Read the lesson → is.
Why 'Impermanent'?
It's called "impermanent" because:
- If the price returns to its starting point — the loss disappears
- If the price doesn't return — the loss becomes permanent
In reality, the price rarely returns exactly, so IL is usually permanent.
Notice: the FURTHER the price drifts from your entry point (in either direction), the bigger the IL. Right at the entry point (0%) IL is zero.
The IL formula
Classic-style AMM (Uniswap V2)
The simplest formula, for liquidity spread from $0 to infinity:
IL = 2 × sqrt(r) / (1 + r) - 1
Where r = new price / old price
| Price change | IL | How much you lose |
|---|---|---|
| −50% | −5.72% | Moderate |
| −30% | −1.57% | Small |
| −20% | −0.62% | Very small |
| 0% (unchanged) | 0% | Nothing |
| +20% | −0.41% | Very small |
| +50% | −2.02% | Small |
| +100% | −5.72% | Moderate |
| +200% | −13.40% | Large |
Concentrated LP — IL is much bigger!
In concentrated LPLPLiquidity Provider — deposits tokens into a pool and earns a share of trading fees.Read the lesson → positions, IL is much bigger, because your capital is packed into a narrower range:
Concentrated IL ≈ Plain IL × Concentration factor
A narrower range = bigger IL (and bigger fees)
The narrower your bounds, the more you earn in fees — and the bigger your IL. These are two sides of the same coin. In practice this means: when you see a narrow range, ask yourself "what risk am I being paid these higher fees for?" — and choose your range deliberately, not blindly.
| Range width | How much bigger IL is | IL at a −20% price move |
|---|---|---|
| Full range ($0–infinity) | 1x | −0.62% |
| $70–$110 (±22%) | ~9x | −5.7% |
| $80–$100 (±11%) | ~14x | −8.8% |
| $85–$95 (±6%) | ~16x | −10.1% |
Note: as the range narrows, this multiplier doesn't grow without limit — the price exits a narrow range quickly, and beyond it IL grows more slowly.
The key insight: LP ≈ Short Straddle (profit from a calm market)
An LP position = a sold insurance policy
An LPLPLiquidity Provider — deposits tokens into a pool and earns a share of trading fees.Read the lesson → position behaves like an insurance company: if nothing bad happens (price stays put) — the fees you collect are pure profit. If something bad does happen (price swings hard) — you have to pay out (the IL loss).
When the price is calm → You collect fees → Profit When the price swings hard → IL exceeds fees → Loss
A visual explanation
P&L (profit/loss)
^
| Fees
| ╱‾‾‾‾‾‾‾╲ ← Price stays put = profit
| ╱ ╲
|──╱─────────────╲──── ← Breakeven point
| ╱ ╲
|╱ ╲ ← Price swings hard = loss
└───────────────────────→ Price
Lower Current Upper
bound bound
What this means
| What happens | LP outcome |
|---|---|
| Price +5% in a month | Fees > IL → profit |
| Price −5% in a month | Fees > IL → profit |
| Price −30% in a month | IL > fees → loss |
| Price +50% in a month | IL > fees → loss |
| Price unchanged | Maximum fees → profit |
A worked example
Starting data:
- SOLSOLSolana's native token. Used to pay gas and as collateral. price: $88
- LPLPLiquidity Provider — deposits tokens into a pool and earns a share of trading fees.Read the lesson → position: $3,200 USDCUSDCA USD stablecoin issued by Circle. Regulated, audited monthly. Our primary stablecoin and loan asset in the Kamino/Aave strategies., range $64–$88
- Income: ~68% APRAPRAnnual Percentage Rate — the annual interest rate WITHOUT compounding. 10% APR = +10% per year. ($5.95/day)
Scenario: SOL drops 30% to $61.60
Calculating the IL
What happens inside the LP position:
- The price drops below the lower bound ($64)
- The entire USDCUSDCA USD stablecoin issued by Circle. Regulated, audited monthly. Our primary stablecoin and loan asset in the Kamino/Aave strategies. position "converts" into SOLSOLSolana's native token. Used to pay gas and as collateral. (the LPLPLiquidity Provider — deposits tokens into a pool and earns a share of trading fees.Read the lesson → automatically buys SOLSOLSolana's native token. Used to pay gas and as collateral. all the way down from $88 to $64)
- That SOLSOLSolana's native token. Used to pay gas and as collateral. is now worth less than your original USDCUSDCA USD stablecoin issued by Circle. Regulated, audited monthly. Our primary stablecoin and loan asset in the Kamino/Aave strategies. was
The math:
- Starting value: $3,200 USDCUSDCA USD stablecoin issued by Circle. Regulated, audited monthly. Our primary stablecoin and loan asset in the Kamino/Aave strategies.
- SOLSOLSolana's native token. Used to pay gas and as collateral. received: ~42.6 SOLSOLSolana's native token. Used to pay gas and as collateral. (average purchase price ~$75 — the geometric mean of $64–$88)
- SOLSOLSolana's native token. Used to pay gas and as collateral. value now: 42.6 × $61.60 ≈ $2,624
- IL = −$576 (−18%)
But fees collected over the month:
- $5.95 × 30 = $178.50
Net result: $178.50 − $576 = −$397.50 (a loss)
Even a high ~68% APRAPRAnnual Percentage Rate — the annual interest rate WITHOUT compounding. 10% APR = +10% per year. only covers part of the loss when the price runs all the way through the range. This is exactly why, in our strategies, downside risk gets an extra layer of options protection (see below).
How our strategies manage IL
Strategy A — LP + options protection
| Component | Role |
|---|---|
| LPLPLiquidity Provider — deposits tokens into a pool and earns a share of trading fees.Read the lesson → position | Earns fees |
| Long Put SpreadPut SpreadLong put + short put. Cheaper protection than a plain put, but with limited coverage. | Protects against a drop (offsets IL to the downside) |
| Short CallCallAn option type that grants the right to BUY at the strike price. The opposite of a put. | Extra income lowers the cost of the insurance |
Strategy B — in detail
| Component | Delta | IL protection |
|---|---|---|
| LPLPLiquidity Provider — deposits tokens into a pool and earns a share of trading fees.Read the lesson → position | +11.5 SOLSOLSolana's native token. Used to pay gas and as collateral. | Generates the IL itself |
| Long PutPutAn option type that grants the right to SELL at a set price. Used as insurance. $90 | −84 SOLSOLSolana's native token. Used to pay gas and as collateral. | Primary protection |
| Short PutPutAn option type that grants the right to SELL at a set price. Used as insurance. $65 | +18 SOLSOLSolana's native token. Used to pay gas and as collateral. | Funds the protection |
| Short PutPutAn option type that grants the right to SELL at a set price. Used as insurance. $60 | +12 SOLSOLSolana's native token. Used to pay gas and as collateral. | Extra funding |
| Short CallCallAn option type that grants the right to BUY at the strike price. The opposite of a put. $160 | −4 SOLSOLSolana's native token. Used to pay gas and as collateral. | Extra income |
| Net options | −58 SOL (~−81 with adjustments) | Covers ~64% |
Ways to reduce IL
| Approach | How it works | Effectiveness |
|---|---|---|
| Wider range | Lower IL, but also lower income | Moderate |
| Single-sided LPSingle-sided LPAn LP position using a single token (usually USDC). In our strategy, it functions like a paid limit order.Read the lesson → | Only the USDCUSDCA USD stablecoin issued by Circle. Regulated, audited monthly. Our primary stablecoin and loan asset in the Kamino/Aave strategies. side — less IL | High |
| OptionsOptionA financial contract that grants the right (but not the obligation) to buy or sell at a set price. protection | PutPutAn option type that grants the right to SELL at a set price. Used as insurance. protection against a drop | High (but costs money) |
| Frequent fee collection | Income gets "locked in" ahead of IL | Moderate |
| Dynamic fee (MeteoraMeteoraA Solana DLMM (bin-based) liquidity protocol. An alternative to Orca, with dynamic fees.Read the lesson →) | Higher fee when IL is at its worst | Moderate-high |
When do fees cover the IL?
Once you can read this table, you'll be able to say in advance, for a given price move, whether a specific position is still profitable — a skill that turns LPLPLiquidity Provider — deposits tokens into a pool and earns a share of trading fees.Read the lesson →-ing from "guessing" into a calculated decision.
The key question — do you earn more than you lose:
Breakeven = Fees over the period ≥ IL over the period
| SOL drop in a month | IL ($3,200 position, range $64–$88) | Fees (~68% APR) | Result |
|---|---|---|---|
| −5% | −$14 | +$178 | +$164 profit |
| −10% | −$57 | +$178 | +$121 profit |
| −15% | −$132 | +$178 | +$46 profit |
| −20% | −$242 | +$178 | −$64 loss |
| −30% (out of range) | −$576 | +$178 | −$398 loss |
Breakeven — around a −17% drop: up to that point, fees still cover the IL. If the price rises above $88 this position takes no IL (it was opened at the upper bound, 100% USDC), but above the range fees stop accruing too.
The golden rule
An LPLPLiquidity Provider — deposits tokens into a pool and earns a share of trading fees.Read the lesson → position is profitable when the price moves less than expected. If the market is calm — the LPLPLiquidity Provider — deposits tokens into a pool and earns a share of trading fees.Read the lesson → earns. If the market is jumpy — the LPLPLiquidity Provider — deposits tokens into a pool and earns a share of trading fees.Read the lesson → loses. Exactly like an insurance company.
Try it yourself
Impermanent Loss Kalkuliatorius
Glossary
| Term | Meaning |
|---|---|
| Impermanent Loss | The value lost in an LPLPLiquidity Provider — deposits tokens into a pool and earns a share of trading fees.Read the lesson → position due to a price change |
| Concentration factor | How many times bigger IL gets from a narrower range |
| Short Straddle | An options strategy that profits when the price is calm |
| Breakeven APR | The minimum APRAPRAnnual Percentage Rate — the annual interest rate WITHOUT compounding. 10% APR = +10% per year. needed for fees to cover the IL |
Next up: single-sided LPLPLiquidity Provider — deposits tokens into a pool and earns a share of trading fees.Read the lesson → — a strategy that reduces IL.
IL stops being scary once you calculate it yourself. Takes about 10 minutes — just a calculator and paper, no real money involved.
This is learning, not investing — use only small amounts you treat as tuition.
You just compared IL against fees and found the position's breakeven point — most people never do this, they just hear "IL is dangerous".