Impermanent loss (IL) is one of the most misunderstood concepts in DeFi.
Many beginners deposit funds into liquidity pools, see a high APY, and assume they’re earning “free money.”
Then the market moves…
And suddenly their balance is lower than if they had simply held the tokens.
This isn’t a scam.
It’s a mathematical side-effect of how automated market makers (AMMs) work.
In this beginner’s guide, you’ll learn:
-
What impermanent loss actually is
-
Why it happens
-
When it hurts you
-
When it doesn’t
-
How yield aggregators reduce or offset IL
-
And which strategies minimize risk
By the end, you’ll understand IL well enough to choose safer DeFi strategies instead of guessing.
Panaprium is independent and reader supported. If you buy something through our link, we may earn a commission. If you can, please support us on a monthly basis. It takes less than a minute to set up, and you will be making a big impact every single month. Thank you!
What Is Impermanent Loss (IL)?
Impermanent loss occurs when you provide liquidity to an AMM (like Uniswap, SushiSwap, Curve, Raydium, etc.) and the price of the tokens moves relative to each other.
Because AMMs keep token ratios balanced, they constantly rebalance your liquidity.
When prices change, the pool automatically sells the token that is rising and buys the token that is falling.
This keeps the pool balanced —
but it means you end up owning more of the losing asset and less of the winning one.
That “loss compared to holding” is impermanent loss.
It is called impermanent because the loss disappears if prices return to their original ratio.
But in real markets…
Prices rarely return exactly to where they started.
Why IL Happens (Simple Example)
Imagine you provide liquidity to an ETH/USDC pool.
You deposit:
-
1 ETH
-
2000 USDC
Total value = $4,000
Now ETH doubles to $4,000.
If you simply held:
-
1 ETH → $4,000
-
$2,000 USDC
= $6,000
-
But in the pool…
Because AMMs maintain a 50/50 value ratio, the pool:
-
sells some ETH
-
buys more USDC
When you withdraw, you might end up with:
-
0.7 ETH
-
2800 USDC
Value = 0.7 × 4000 + 2800 = $5600
You earned fees…
But you also lost $400 compared to simply holding.
That difference = impermanent loss.
When IL Is Worst
Impermanent loss becomes significant when:
1. One token moves sharply relative to the other
Example:
-
ETH pumps 200%
-
USDC doesn’t move
High divergence = high IL.
2. You provide liquidity in volatile pairs
Like:
-
ETH/BTC
-
MEME/ETH
-
ALT/BTC
These pairs swing fast, so IL grows fast.
3. You stay in the pool for a long time while prices trend
Trending markets cause the pool to rebalance continuously.
When IL Is Small or Negligible
IL is minimal when:
1. Tokens are stable (stablecoin pairs)
Examples:
-
USDC/USDT
-
DAI/USDC
-
FRAX/USDC
These pairs barely move → very low IL.
2. You earn enough fees to offset IL
High-volume pools earn significant trading fees.
If the fees > IL → you still profit.
3. You use low-volatility assets
Blue-chip pairs like:
-
ETH/USDC
-
BTC/USDC
-
stETH/wstETH
Typically have lower IL than exotic pairs.
How to Calculate IL (Conceptually)
IL depends on price change magnitude.
Formula (simplified):
IL ≈
[
2 \times \sqrt{\frac{P_{new}}{P_{old}}} - \frac{P_{new}}{P_{old}} - 1
]
Don’t memorise it —
Just understand the intuition:
-
Small price moves → tiny IL
-
Big moves → large IL
-
Infinite divergence → IL approaches 100%
Why Yield Farming Can Still Be Profitable Despite IL
Because liquidity providers earn fees, not just token exposure.
For example:
-
Pool fee: 0.3%
-
Daily volume: $100M
-
LP share: 0.01%
Daily fees =
0.3% × 100M × 0.01%
= $3,000 per day distributed
If IL = $400
but fees = $600
→ Net profit.
This is why major pools like ETH/USDC or BTC/ETH remain profitable despite IL.
How Yield Aggregators Reduce Impermanent Loss
Yield aggregators don’t “remove” IL —
but they reduce it through strategy design and automatic optimization.
Here’s how.
Aggregators Choose Low-IL Strategies
Many safe aggregators avoid volatile LP pairs entirely.
Instead they use:
-
Stablecoin pairs
-
Liquid-staking tokens (stETH, rETH, wstETH)
-
Lending strategies
-
Single-asset vaults
-
Tokenized yield (Pendle)
These strategies:
-
avoid IL
-
rely on real yield
-
still compound automatically
Aggregators Auto-Rebalance Positions
When prices move sharply, some aggregators:
-
exit LP positions
-
move to stable assets
-
re-enter later
-
or switch to safer pools
This minimizes the time your capital is exposed to high-IL environments.
Aggregators Compound Fees Efficiently
Manual compounding wastes gas and time.
Aggregators:
-
batch transactions
-
auto-harvest
-
auto-sell rewards
-
auto-reinvest
Because compounding is faster and cheaper, fees accumulate more efficiently → IL is offset sooner.
Aggregators Use Multi-Strategy Vaults
Advanced vaults diversify risk by mixing:
-
staking
-
lending
-
LP farming
-
options
-
synthetic yield
When one strategy suffers IL, others compensate.
This reduces volatility and improves consistency.
Aggregators Avoid Risky Token Rewards
Many high-APY farms rely on inflationary rewards.
Inflationary tokens crash → IL worsens.
Good aggregators:
-
sell rewards immediately
-
convert to stablecoins
-
or reinvest into safer assets
This stabilizes returns.
Best Beginner Strategies With Minimal Impermanent Loss
If you’re new, start with strategies where IL is naturally low:
1. Liquid Staking Token Vaults (LSTs)
Examples:
-
stETH
-
rETH
-
wstETH
No IL because it’s a single asset.
Earn:
-
staking yield
-
compounding
-
sometimes protocol incentives
2. Stablecoin Vaults
USDC, DAI, USDT
IL ≈ 0
APY = fees + lending interest
3. Lending Aggregators
Aave, Compound, Morpho, Euler
No IL
Real yield from borrowers
4. Low-volatility LP pairs
ETH/USDC
BTC/USDC
IL exists but manageable
Fees often offset it
Strategies You Should Avoid as a Beginner
These pairs create high IL and unstable returns:
-
MEME/ETH
-
ALT/BTC
-
Small-cap LP tokens
-
Leverage farms
-
Farms with > 500% APY
-
Tokens with high emissions
High APY usually means:
-
high inflation
-
high selling pressure
-
high IL
-
high risk
How to Tell If a Pool Is Worth Farming (IL + Fees)
Ask two questions:
1. Is the pair volatile?
Higher volatility = higher IL risk.
2. Is volume high enough to offset IL?
If volume is low → IL dominates.
If volume is high → fees dominate.
Good farming pairs:
-
ETH/USDC
-
BTC/USDC
-
stETH/wstETH
-
Stablecoin pairs
Bad farming pairs:
-
New tokens
-
Meme coins
-
Thin liquidity
-
Low volume
How Aggregators Make IL Manageable for Beginners
Aggregators simplify everything by:
-
selecting safer pools
-
avoiding risky pairs
-
compounding automatically
-
switching strategies when risk rises
-
reducing exposure time
-
monetizing fees more efficiently
They don’t eliminate IL,
but they smooth out returns and prevent beginners from making risky manual choices.
This is why aggregators are often the best entry point for new yield farmers.
Final Thoughts: IL Isn’t a “Loss” If You Choose the Right Strategy
Impermanent loss is not a defect —
it’s a by-product of AMMs balancing liquidity.
But you can manage it by:
-
choosing low-volatility pairs
-
relying on fees + compounding
-
avoiding inflationary tokens
-
using yield aggregators
-
diversifying strategies
-
farming only on high-volume pools
For most beginners, the safest path is:
-
LST auto-compounding (no IL)
-
Stablecoin vaults (near zero IL)
-
Lending strategies
-
Blue-chip LPs (moderate IL)
-
Only then, riskier LP farming
Was this article helpful to you? Please tell us what you liked or didn't like in the comments below.
Disclaimer: The above content is for informational and educational purposes only and does not constitute financial or investment advice. Always do your own research and consider consulting with a licensed financial advisor or accountant before making any financial decisions. Panaprium does not guarantee, vouch for or necessarily endorse any of the above content, nor is responsible for it in any manner whatsoever. Any opinions expressed here are based on personal experiences and should not be viewed as an endorsement or guarantee of specific outcomes. Investing and financial decisions carry risks, and you should be aware of these before proceeding.
About the Author: Alex Assoune
Alex Assoune (MS) is a global health and environmental advocate. He founded Panaprium to inspire others with conscious living, ethical, and sustainable fashion. Alex has worked in many countries to address social and environmental issues. He speaks three languages and holds two Master of Science degrees in Engineering from SIGMA and IFPEN schools.
What We're Up Against
Multinational corporations overproducing cheap products in the poorest countries.
Huge factories with sweatshop-like conditions underpaying workers.
Media conglomerates promoting unethical, unsustainable products.
Bad actors encouraging overconsumption through oblivious behavior.
- - - -
Thankfully, we've got our supporters, including you.
Panaprium is funded by readers like you who want to join us in our mission to make the world entirely sustainable.
If you can, please support us on a monthly basis. It takes less than a minute to set up, and you will be making a big impact every single month. Thank you.
RELATED ARTICLES
Tags
Yearn vs Beefy vs AutoFarm: Which Yield Aggregator Is Best for You?
The world of DeFi yield farming is full of opportunities—and pitfalls. For many investors, yield aggregators like Yearn, Beefy, and AutoFarm offer a convenient way to automate yield optimization, compounding... Read More
High Yield, High Risk? 7 Vaults With >50 % APY & What That Means
In decentralized finance (DeFi), yields above 50 % APY immediately draw attention. They can accelerate portfolio growth faster than almost any traditional financial product. However, yields at this level rarely... Read More
Beginner’s Guide to Impermanent Loss: What It Is & How Aggregators Mitigate It
Impermanent loss (IL) is one of the most misunderstood concepts in DeFi.Many beginners deposit funds into liquidity pools, see a high APY, and assume they’re earning “free money.” Then the... Read More
Best DeFi Lending Platforms for ETH, stETH & rETH to Optimize Yields
As more investors stake Ethereum and hold liquid-staked ETH tokens like stETH (from Lido Finance) or rETH (from Rocket Pool), demand has grown for lending platforms that let you deposit... Read More
The Spiritual Power of Being Born Under a Void-of-Course Moon
Most people have never heard of the Void-of-Course Moon, yet it’s one of the most mystical and misunderstood energies in astrology. When the Moon is “void,” it’s drifting between signs, making... Read More
The Role of Oracles in Ancient Greece: Voices of the Divine
In the ancient world, no civilization relied on divine guidance more than the Greeks. From kings and generals to farmers and families, people traveled across mountains and seas to ask... Read More
Liquid Staking vs Regular Staking: Which Gives Better Yield?
Staking has become one of the most popular ways to earn passive income in crypto. Whether you’re holding Ethereum, Solana, or NEAR, staking lets you earn rewards simply by helping... Read More
The Link Between Past Lives and the South Node
In astrology, the South Node is one of the most powerful indicators of your soul’s past. It reveals the patterns, gifts, wounds, and habits you carried with you from previous lifetimes.... Read More
How to Read Annual Percentage Yields (APY) on Vaults: What the Numbers Don’t Tell You
When you browse vaults on DeFi platforms, the APY number is often the first thing that catches your eye. It looks simple, bold, and promising—sometimes unbelievably promising. But those shiny... Read More
DeFi Yield Aggregators for Beginners: How They Work, What to Watch, How to Start
DeFi yield aggregators make it easier to earn passive income from crypto—without manually hopping between farms, calculating rewards, or monitoring APYs all day.But if you're new, the terms, tools, and... Read More
Astrological Synastry: How Spiritual Gifts Show Up in Relationships
Some relationships feel magical from the start. You meet someone and instantly sense a connection—almost like your souls already know each other. Synastry, the astrology of relationships, helps explain why.... Read More
Jupiter’s Blessing: How It Reveals Your Hidden Talents
Some people seem lucky without trying. Opportunities appear. Doors open. Their path feels guided, expanded, protected. This isn’t an accident—it’s Jupiter. In astrology, Jupiter is the planet of blessings, wisdom,... Read More
Are You Destined to Be a Lightworker? How to Tell from Your Chart
Many people feel a deep inner knowing that they’re here for something more—a mission, a calling, a sense that their life has a spiritual purpose. If you’ve ever felt like... Read More
How to Evaluate a New Token for Yield Farming (Before It Blasts or Busts)
New tokens can offer incredible yield farming opportunities… or wipe out your capital overnight.If you jump in blindly, you’re gambling. But with the right evaluation process, you can spot high-potential... Read More
Best Yield Farming Opportunities in the Solana & NEAR Ecosystem
The Solana and NEAR ecosystems are two of the fastest-growing environments for high-speed, low-cost decentralized finance. If you’re looking for strong yield farming opportunities outside of Ethereum, both chains offer... Read More
How Eclipses in Your Chart Mark Turning Points in Your Destiny
Some moments in life feel fated. Sudden endings. Unexpected breakthroughs. A shift you didn’t see coming. A feeling that “everything just changed.”Astrology has a name for these moments: eclipse points—the... Read More
Which Rising Signs Are Natural Empaths? Signs You Might Be One!
Some people walk into a room and instantly feel everything—the moods, the tension, the unspoken energy. These people are natural empaths. And in astrology, your Rising sign (also called the Ascendant)... Read More
The Spiritual Meaning of Being Born During Mercury Retrograde
Most people hear “Mercury retrograde” and immediately think of chaos—mixed signals, delays, and plans falling apart. But being born during Mercury retrograde is a completely different story. Instead of bringing confusion,... Read More
Best DeFi Lending Platforms for SOL, JitoSOL & mSOL on Solana
As Solana’s DeFi space expands, liquid-staking tokens like JitoSOL and mSOL have become powerful building blocks. These LSTs let you stake SOL (earning staking yields or MEV-boosted rewards), and still use... Read More
Best Web3 Gaming Yield Strategies: Play-to-Earn, Staking & Farming Explained
Web3 gaming is no longer just about buying NFTs, leveling up characters, and completing quests. Today, many blockchain games allow players to earn real crypto rewards, build passive income, and participate... Read More
Crypto Tax & Reporting Tools for DeFi Earners: What You Should Use
The Beginner’s Guide to Tracking, Calculating, and Reporting DeFi Taxes Without Stress Decentralized finance (DeFi) has opened the door to high yields, liquidity mining, yield aggregation, and multi-chain strategies. But... Read More
Psychic Children: Birth Chart Signs of a Gifted Soul
Some children arrive with a different kind of awareness.They feel more. See more. Know more. They pick up emotions, energies, and truths long before anyone explains them. These are psychic... Read More
Destiny Markers: Birth Chart Clues to Your Life’s Mission
Every birth chart holds hidden clues about why you’re here. These clues—called destiny markers—reveal the soul mission you chose before incarnating. They point to what you’re meant to learn, contribute, and... Read More
How to Bridge Assets Safely Between Chains for Yield Opportunities
Decentralized finance (DeFi) has exploded across multiple blockchains.Ethereum, Arbitrum, Polygon, Base, Optimism, and dozens of others all host high-yield opportunities, cheaper fees, and innovative protocols. But to access these opportunities,... Read More
1inch vs. Uniswap: Which DEX Should You Use? (Full Comparison Guide)
If you’re exploring decentralized exchanges (DEXs), two names rise above the rest: Uniswap and 1inch. They are both essential to the DeFi ecosystem—but they serve very different purposes. Uniswap is a... Read More
North Node Placement and Your Soul’s Spiritual Calling
Your North Node is one of the most important points in your birth chart. It reveals your soul’s purpose, your spiritual direction, and what you came into this lifetime to... Read More
How Saturn Shapes Your Spiritual Lessons
Saturn is one of the most misunderstood planets in astrology. Many see it as strict, heavy, or limiting. But spiritually, Saturn is your greatest teacher. It doesn’t block your path—it... Read More
0 comments