01 · BasicsWhat impermanent loss actually is
Impermanent loss is the opportunity cost of being a liquidity provider. It measures how much less your pool position is worth compared with simply holding the same tokens in your wallet.
When you add liquidity to a pool, you deposit two tokens — say SOL and USDC. Traders then swap against your liquidity. Every time SOL gets more expensive elsewhere, arbitrageurs buy the cheaper SOL out of the pool until its price matches the wider market. The pool ends up holding less SOL and more USDC. When SOL falls, the opposite happens: the pool accumulates SOL as it gets cheaper.
In other words, an AMM automatically sells the asset that is going up and buys the asset that is going down. That rebalancing is exactly what lets traders swap any time, and it is why LPs earn fees. It is also why, after a big move in either direction, your position is worth less than a “buy and hold” wallet would be.
Two details matter here. First, IL is relative: your position can be up in dollar terms and still show impermanent loss, because holding would have been up even more. Second, IL ignores fees. A position with 8% IL that collected 15% in fees has done better than holding. That is the whole game for an LP.
02 · MathThe formula, in plain numbers
For a classic 50/50 constant-product pool (the x·y = k model behind most AMMs, including Meteora’s full-range Dynamic AMM pools), impermanent loss depends only on how much the price ratio between the two tokens has changed. The size of your deposit doesn’t change the percentage.
Let k be the ratio of price changes. If SOL doubles against USDC, k = 2. If SOL halves, k = 0.5. Then:
IL = 2 · √k ÷ (1 + k) − 1
A quick worked example. You deposit $10,000: $5,000 in SOL at $100 (50 SOL) and $5,000 in USDC. SOL rises to $200, so k = 2.
Value if you had held
50 SOL × $200 + $5,000 USDC = $15,000.
Value inside the pool
The pool rebalances to about 35.36 SOL and $7,071 USDC: 35.36 × $200 + $7,071 ≈ $14,142.
Impermanent loss
$14,142 ÷ $15,000 − 1 ≈ −5.72%, or $858 less than holding — before any fees you earned.
Notice that the LP still made money in dollars: $10,000 became $14,142. IL only tells you that holding would have made more. Whether providing liquidity was worth it depends on whether fees covered that $858 gap.
03 · ReferenceImpermanent loss at a glance
The numbers below apply to any 50/50 full-range pool, regardless of which tokens you pair. Use them as a mental shortcut when you scan pools on Meteora.
| Price change of one token vs the other | Ratio (k) | Impermanent loss |
|---|---|---|
| ±10% | 1.10 / 0.90 | ≈ −0.1% |
| +25% / −20% | 1.25 / 0.80 | −0.6% |
| +50% / −33% | 1.5 / 0.67 | −2.0% |
| 2× / −50% | 2 / 0.5 | −5.7% |
| 3× / −67% | 3 / 0.33 | −13.4% |
| 5× / −80% | 5 / 0.2 | −25.5% |
| 10× / −90% | 10 / 0.1 | −42.5% |
Two patterns stand out. Small moves barely matter — a 10% swing costs about a tenth of a percent. And the formula is symmetric in ratio terms: a token doubling and a token halving produce the same IL, because in both cases the ratio moved by a factor of two.
04 · MeteoraHow IL behaves in DLMM and DAMM pools
Meteora runs two main families of pools, and impermanent loss shows up differently in each.
Close to the textbook formula
Full-range DAMM pools spread your liquidity across every possible price, just like the table above. IL follows the classic curve. DAMM v2 also lets pool creators set a narrower price range, which makes it behave more like concentrated liquidity.
Concentrated, bin by bin
In DLMM your liquidity sits in discrete bins. While price moves through your range, you are selling one token for the other at each bin — the same economics as IL, only compressed into your chosen range.
Concentration is a double-edged tool. Because the same capital covers fewer price points, a DLMM position earns more fees per dollar while price stays in range — and experiences larger relative IL when price trends through it. Once price leaves the range entirely, your position holds only one token. If price exited upward, you sold all your volatile token on the way up; if it exited downward, you bought it all on the way down.
DLMM also adds a defence that classic pools lack: dynamic fees. When the market gets volatile — exactly when IL accumulates fastest — the variable part of the fee goes up. You are paid more for absorbing the moves that cause IL.
05 · EconomicsWhen fees beat impermanent loss
The question is never “will I have IL?” but “will my fees be larger than my IL?”. A simple way to frame it is a break-even check:
- Estimate your fee yield from the pool’s 24-hour fees divided by its TVL. A pool earning 0.3% of TVL per day earns roughly 9% a month at constant volume.
- Estimate the move you are exposed to over the same period. If you think the pair could move 2× in a month, budget about 5.7% IL for a full-range position — more for a tight DLMM range.
- Compare. 9% fees against 5.7% IL is a positive month. 2% fees against 13% IL is not.
Volume is the variable most people overestimate. A pool that looks great on a hype day can lose most of its volume within a week while the price move — and your IL — stays. Look at several days of fee history before you commit, not a single snapshot.
06 · PlaybookSeven practical ways to limit IL
- Pick correlated pairs. Stablecoin pairs and SOL paired with liquid staking tokens move together, so the price ratio barely changes.
- Size the range to the volatility. In DLMM, a wider range (or a larger bin step) means less IL per bin and fewer exits from range.
- Use one-sided liquidity on purpose. If you want to sell a token as it rises, place it above the current price. You turn IL into a planned take-profit ladder.
- Prefer pools with real, repeating volume. Steady fee income is what pays for IL over time.
- Claim and review fees regularly. Compounding helps, but so does realising whether fees are keeping up.
- Rebalance deliberately, not emotionally. Each rebalance locks in the IL so far. Have a rule — for example, “only when price has been out of range for 24 hours”.
- Keep position sizes sensible. No strategy removes the risk of the underlying token going to zero.
If you are new to concentrated liquidity, our step-by-step guide to Spot, Curve and Bid-Ask strategies shows how each shape reacts to the same price move.
07 · ClarityCommon misconceptions
| Myth | Reality |
|---|---|
| “IL means I lost money.” | It means you made less than holding. Your dollar value can still be up. |
| “IL only happens when price falls.” | It happens in both directions. A 2× pump and a 50% drop produce the same IL. |
| “High APR cancels IL.” | Only if the APR is sustained. Fees are earned over time, while IL can arrive in an hour. |
| “Single-sided deposits have no IL.” | They change the shape of your exposure but still convert one token into another as price crosses your range. |
| “Withdrawing early avoids IL.” | Withdrawing locks in whatever IL exists at that moment. |
Impermanent loss isn’t a reason to avoid liquidity provision. It is the price of earning fees, and good LPs plan for it. Pick pairs whose volatility you understand, check that fee income is real and repeating, and size each position so a bad move is a lesson rather than a disaster.
