Impermanent loss is a cost a pool imposes on its providers

Inherited archive entry · retained from the earlier edition. Its factual, legal and policy claims have not all been reverified for 19 September 2026. Research scope.

A pool rebalances against you, not for you

Uniswap's own documentation describes a liquidity pool as a pair of token reserves that anyone can add to in exchange for liquidity tokens representing a share of that pool, calculated for an initial deposit as the square root of the two reserve amounts multiplied together. Every trade that passes through the pool shifts the reserves according to the constant-product rule, which means every price move changes the ratio of the two assets a provider is entitled to withdraw. A provider does not choose this reallocation trade by trade; the pool performs it automatically, in both directions, whether the price is moving in the provider's favour or against it.

The word "impermanent" hides a real cost

The documentation's own worked examples give the size of that cost: a 1.25x price change produces a 0.6% loss relative to simply holding the two assets, a 2x change produces 5.7%, and a 5x change produces 25.5%, and the loss is identical in magnitude whichever direction the price moves. The loss is called impermanent because it disappears if the price returns to the level it was at on deposit. A provider who withdraws while the move persists realises it in full; nothing about the label makes that outcome temporary for them. The documentation is candid that it is "difficult to know" whether fee income outpaces this loss without knowing the volume of trades in between, which is a way of saying the trade-off cannot be assumed to be favourable.

What later versions changed, and what they did not

Uniswap's protocol overview describes v3's introduction of concentrated liquidity, letting a provider commit capital to a narrower price range for a larger share of fees within it, and v4's addition of customisable hooks. Neither change removes the constant-product relationship between reserves and price; concentrating a position into a narrower range increases how quickly that provider's ratio shifts once the price exits the chosen range. The formula's exposure did not go away between versions. Its shape, and how quickly a provider feels it, did.

Questions to carry forward

• Does an advertised yield figure for a pool already net out the loss a provider would take if withdrawing at today's price, or only the fees collected?
• How does the answer change for a concentrated position with a narrow price range compared with a full-range position in the same pool?
• What trading volume would a pool need, over what period, for a stated fee tier to plausibly outrun the loss at a given level of price movement?

"Impermanent" is an accurate word for a specific, narrow case: a price that round-trips before a provider withdraws. For any other path a price actually takes, it is a name for a real, realised cost, sized by the pool's own formula rather than by anything the provider controls.