How To Avoid Impermanent Loss
Impermanent loss is a risk that affects liquidity providers (LPs) in decentralized finance (DeFi), particularly in automated market makers (AMMs) like Uniswap, SushiSwap, or PancakeSwap. It occurs when the price of tokens in a liquidity pool changes compared to when you deposited them — leading to a lower value than simply holding the tokens.
🧠 What Is Impermanent Loss (IL)?
If the price of your deposited tokens changes significantly (up or down), you may lose value versus just holding them outside the pool. The loss is “impermanent” because it only becomes real when you withdraw from the pool — prices may return to original levels, reducing or erasing the loss.
✅ How to Avoid or Reduce Impermanent Loss
1. Choose Stablecoin Pairs
- Provide liquidity in stablecoin-stablecoin pools (e.g., USDC/DAI, USDC/USDT).
- These assets move together in price, reducing the chance of large divergence.
🔒 Low volatility = low IL risk
2. Use Pools With Low Volatility Assets
- Avoid high-volatility pairs (e.g., ETH/SHIBA or BTC/DOGE).
- Use pairs like ETH/wETH or ETH/stETH, where the assets are tightly correlated.
3. Consider Single-Sided Staking or Lending
- Instead of providing liquidity in pairs, stake or lend a single asset.
- Platforms like Aave, Compound, or Lido offer yield without IL risk.
4. Use Protocols With IL Protection
- Some platforms offer impermanent loss insurance or compensation, such as:
- Bancor (v3) – Offers IL protection after a vesting period.
- Thorchain – Covers IL after a set time.
- Check the fine print — there are often conditions.
5. Provide Liquidity for Short Periods
- IL gets worse as price divergence grows over time.
- Short-term LPing (especially during stable markets) can minimize risk.
6. Avoid Yield Chasing Without Risk Analysis
- High APY often comes with high volatility and high IL.
- Calculate whether the rewards outweigh the potential loss.
7. Monitor Your Pool Regularly
- Use tools like:
- APY.vision
- Impermanent Loss Calculator
- These help you track IL and decide whether to stay in or exit.
8. Understand Pool Composition Changes
- LPs receive fees, but the token ratios change as trades happen.
- Be aware of how far your token ratio might shift before you pull out.
9. Avoid Providing Liquidity Before Major News or Events
- News (protocol upgrades, lawsuits, hacks) can cause sharp price swings → high IL.
- Stay out of pools during high-volatility windows.
📌 Summary Table
| Strategy | Effectiveness Against IL |
|---|---|
| Stablecoin pairs | ✅✅✅ |
| Correlated asset pairs | ✅✅ |
| Protocols with IL protection | ✅✅✅ |
| Short-term liquidity | ✅✅ |
| Single-sided staking/lending | ✅✅✅ |
| Monitoring pools & rebalancing | ✅✅ |