Impermanent Loss and Liquidity Provider Exposure
Impermanent loss describes how a liquidity position’s value can differ from holding the starting assets after relative prices change, before accounting for fees or incentives. “Impermanent” does not mean harmless or guaranteed to reverse.
How it works
For a fee-free 50/50 constant-product pool with full-range exposure and arbitrage to external prices, the value ratio versus holding is 2√r/(1+r), where r is the relative price multiplier of one asset. This formula does not automatically apply to concentrated-liquidity, stable-swap or other designs.
Worked example
Start with 1 ETH worth 100 and 100 stable units, total 200, treating the stable unit as worth 1. If ETH doubles to 200, the corresponding pool position becomes about 0.7071 ETH plus 141.421 stable units, worth 282.843. Holding the original assets would be worth 300. Relative shortfall=282.843/300−1≈−5.72%. The pool position rose in value, yet underperformed holding. Fees were excluded, so net performance remains a separate calculation.
Amounts, prices and scenarios are fictional teaching examples. They exclude any effects not explicitly stated and are not trade recommendations.
Limits and common mistakes
Fees might offset the shortfall or might not. Stablecoin failure, contract bugs, range exits, price jumps and withdrawal costs add different risks. Withdrawing can realize the changed asset mix; waiting does not guarantee a return to the original relative price.
Knowledge check
Can a liquidity position gain in currency value and still show impermanent loss?
Read the explanation
Yes. The comparison is against holding the original assets, not necessarily against the starting currency amount. In the example both gained, but holding gained more.
References and further reading
These sources explain the underlying concepts and specifications. They do not endorse QBMFX Academy. Check the relevant market, protocol version and reporting rules before applying an example.