What is impermanent loss? The hidden cost of providing crypto liquidity
By SendPay Business · · 2 min read
Impermanent loss is the difference between what a liquidity provider's tokens are worth in an automated market maker pool and what they'd be worth if they'd simply held them. It happens when the prices of the two tokens in the pool move apart.
Why it happens
When one token's price rises on other markets, traders buy it cheaply from the pool until the pool price catches up. The pool ends up holding less of the token that rose and more of the one that didn't, so the provider misses out on part of the gain.
A rough guide to the size
- If one token's price doubles against the other, the loss versus holding is about 5.7%.
- If it rises 4 times, the loss is about 20%.
- The bigger the price move in either direction, the bigger the loss.
Why 'impermanent'?
If prices return to where they were when you deposited, the loss disappears. If you withdraw while prices are apart, it becomes a real loss. Trading fees earned from the pool can make up for it, but not always.
Where SendPay fits
SendPay doesn't offer DeFi or liquidity pools. SendPay platforms let your customers buy, sell and hold crypto under your own brand, with assets held by regulated partners and a trading fee you set.
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Pick a template, name it, brand it, preview every page before you pay. Your brand, your users, your fees.
Build my platform →Questions people ask
How does a swap in an AMM pool get priced?
Enter the pool balances and your swap into the free calculator.
AMM swap calculator →How much would I lose in a pool?
Work out impermanent loss from price changes.
Impermanent loss calculator →Read next
This guide is general information, not legal or financial advice. SendPay Business is a technology company, not a bank, and does not take deposits; regulated services on the platforms are provided by licensed partners. PayPal, Patreon and Substack are named as reference points only and are not affiliated with SendPay Business.