What Is IMPERMANENT LOSS? DEFI Explained - Uniswap, Curve, Balancer, Bancor

Have you ever provided liquidity to a liquidity pool just to realise that some of your coins have gone missing? In this video, we’ll learn what “impermanent loss” is and how it can affect liquidity providers’ profits.
In essence, impermanent loss is a temporary loss of funds occurring when providing liquidity. It’s very often explained as a difference between holding an asset versus providing liquidity in that asset. Impermanent loss is usually observed in standard liquidity pools where the liquidity provider (LP) has to provide both assets in a correct ratio, and one of the assets is volatile in relation to the other, for example, in a Uniswap DAI/ETH 50/50 liquidity pool.
If ETH goes up in value, the pool has to rely on arbitrageurs continually ensuring that the pool price reflects the real-world price to maintain the same value of both tokens in the pool. This basically leads to a situation where profit from the token that appreciated in value is taken away from the liquidity provider. At this point, if the LP decides to withdraw their liquidity, the impermanent loss becomes permanent.
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[@Finematics]

❓Have you ever been affected by Impermanent Loss? 👍Hit the like button if you enjoyed this video 🐦Follow Finematics on Twitter ► twitter.com/finematics 💛Support Finematics on Patreon and join our Discord community ► www.patreon.com/finematics

[@90nomads]

I got wrecked on AMPL/ETH pool - such bad timing 😥

[@anon-jo5gm]

What happens in the "opposite" scenario where token A increases in price and token B remains the same? What happens if both tokens increase in value? (Can't find the answer anywhere)

[@jadeemme3697]

Hey, would you be able to explain how APRs are calculated/executed for LP providers? Some of those APRs listed are insanely highly, like 1000% APR. Is that too good to be true, and how do the LPers accrue this APR? Through tokens? Through the coins they put into the LP?

[@siralexbateman]

Yeah, do you effectively get more if the opposite happened? The coin value goes down. Do you get the coins back plus more $?

[@AlexTrout79]

I’ve been affected by both impermanent and permanent loss

[@fatjohn1408]

I could listen to you saying 'arbitrageur' all day.

[@rafaelfarcher6955]

My new notification sound.

[@bloodthyrsty]

@@rafaelfarcher6955 :D :D

[@trapOrdoom]

On my life!

[@randomvids9388]

Lol

[@atletiekcoach2552]

😂

[@theprez77]

Its great that Count Von Count is teaching Defi to the kids.. Great vids, thank you kindly for making, but sorry had to do it.

[@beny.5736]

I guess the key lesson is that if you are providing liquidity, do so in assets that are expected to maintain their relative value over the long term if you don't want to suffer from impermanent loss.

[@gnarxy]

but you're missing the point of the LP tokens. Say you are doing a SOME TOKEN/DAI pair.. and providing the liquidity. DAI is a stable coin.. so even if SOME TOKEN goes up 500% in value, which would give you impermanent loss of about 25% of SOME TOKEN. But you also received the LP token for that pull and are farming more of SOME TOKEN at a 2000% APY, the additional SOME TOKENS you are earning and able to harvest, far outweigh the impermanent loss.

[@mr.november1857]

How do you know that they’re going to maintain their relative value? You don’t. Especially if it’s two assets you’re providing - making it that much challenging. The incentives I believe and the lack of fear can help - just don’t know anyone knows if anyone knows anything tbh

[@parrishdominguez3495]

@@gnarxy If you see this comment can you look at my question I posted up top :), I think you just answered my question. Is it fair to say if the APY is higher than the Impermanent Loss, and assuming the Assets didnt drop to 0. Profits will be made?

[@Showmetheevidence-]

True, except crypto is - by it's nature - so volatile that it's almost impossible to predict. Stable coins might be the only ones that have any level of stability. Pesonally I think for smaller investors you're actually better off just staking coins.

[@Showmetheevidence-]

@@mr.november1857 They're mostly making it up! No-one can accurately predict the ratios of coin values...

[@youtubeismyjockey7581]

Well explained, the calculation example really helps!

[@geekkstuff6674]

Finally understood permanent loss. Better than most videos on the topic. Loves the examples on how much you can lose.

[@Bashar3A]

Great video. I'm holding on to some volatile assets I'm expecting to raise in price in near future, and thus reluctant to putting it in pools.

[@elhexidente9832]

Cant believe i didn't find this channel earlier! Thank you!

[@Finematics]

I'm glad you found it now :)

[@scottPL77]

I've already gone through two videos on your channels and both explained to me difficult concepts which I failed before to understand by reading about them. Thanks for that. Really good ratio of knowledge shared vs. video length :)

[@gwho]

This didn't explain jack.

[@BillBlackfund4u]

@@gwho Made sense to me...

[@crvne]

o0o I love that! knowledge:vid Length is a new key metric imo.

[@cryptomadness7271]

@@gwho go back to one of his beginner videos.

[@giordanogiordani81]

Hi, Finematics Team. How are you doing? Guys please, allow automatic subtitles in your videos. Maybe it will help a lot of others people, subscribers of your channel and me as well. As a no-english speacker even though been fluent in english, subtitles always help...thanks and congrats for your excellent work here. Cheers

[@Finematics]

thanks, started adding it for the new videos

[@aaronfreeman4144]

This channel is awesome. I'm grateful for your expertise and time.

[@Finematics]

Thanks! Great to hear :)

[@temitopeagoro4603]

Could you possibly delve into Decentralized autonomous organizations? I love your content and explanations. I am really learning a lot! Thank you!!

[@Finematics]

Sure, there is a plan to make a video about DAOs soon! Stay tuned :)

[@nonamedlish]

Thank youman, I finally understand. Trying to learn this by reading about it was a nightmare

[@mattdhorstman]

Clear, concise, well-illustrated example. Well done.

[@Finematics]

thanks! :)

[@justdoitFR]

Thank you so much for this great content. I am still trying to find out what could be risks for providing liquidity for a pair like USDT vs USDC... Of course excluding any smart contract bug or any hacks because those risks are just inherent to everything in crypto.

[@Finematics]

The main risk is that one of the stable coins can lose its peg to the US dollar. USDT, for example, is not completely transparent, so we don't exactly know if they have all the assets to cover their outstanding USDT balance.

[@kenmeyer100]

@@Finematics yeah, it's like you want to cash out your chips and the casino operator say 'sorry, we have no more dollars for you'

[@postmanwithsnow]

There are none. Only risk is a bank run which won't occur until something really bad happens. But then all your other crypto will most likely be worth nothing anymore either 😉

[@marcelchuo]

Best explainer video on DeFi out there. Thanks man

[@Finematics]

Thanks!!

[@0x0x0xWIP]

arb makes sense, but what happens when the market crashes? Do you just collect fees and hodl in the LP until price is back up?

[@egregius9314]

If both of your tokens crashed equally, you can either HODL your LP tokens until the prices are back up, or take them out. But you might as well park them until they get back up, unless you expect them to get back up unequally. Basically, you want to take them out when the ratios have returned to what you started with, unless the fees have been *really* good to you.

[@mattschroeder1100]

It really boils down to if you believe the tokens will increase in value in the future. Let's put staking aside: If you wouldn't keep your money in an asset, it's probably a good idea to cut your losses and move forward somewhere else

[@Jesussaft]

Great video! I am currently investing in a token which I expect to blow up soon (x10 and above). I thought I am smart by providing liquidity because I would gain fees on all the buys coming in but now it looks like there will be serious impermanent loss. Time to get out of the liquidity pool :D

[@JohnAlanWoods]

Great video - I send this to anyone that needs to understand IL.

[@trevorryder9732]

Could you do a video on non-fungible tokens and their use so far and future use.

[@tyvaughnholness1985]

This was fantastic, thank you! I appreciated the detail on the examples as well.

[@Finematics]

Glad it was helpful!

[@ericniyongira4467]

This channel is really awesome. I am new to Yield Farming - Providing Liquidity, and I hope to learn more from you! Anyone who can recommend me the best way to start?

[@tobiprivat8878]

great! totally underrated content!!

[@seraaron]

So to avoid impermanent loss, is it only advisable to be a LP when the markets are relatively stable? Presumably when there's high volume and high volatility, there's more to be gained by being a LP, but also more potential for losses?

[@sebrady951]

If you have a pair of volatile coins that are strongly correlated to eachother, impermanent loss would be mitigated

[@raylay2197]

@@sebrady951 do you mean inversely co-related?

[@sebrady951]

@@raylay2197 No I don't... That would maximize impermanent loss.

[@samdeb6506]

@@sebrady951 Ah ofcourse, because if two coins move in the same direction (volatile) the impermanent loss would be minimal (or less)

[@sebrady951]

@@samdeb6506 exactly dude , it's all about the relative value between the two coins.

[@omidsarayanibafghi222]

Awesome videos! You have a talent to comprehend and explain hard to grasp concepts in a brief yet comprehensive format.

[@Finematics]

thanks!

[@soundisfunction]

This channel is truly phenomenal

[@poltondt5067]

can you please explain the formulas derived from the constant market maker formula to be able to get the amount needed for arbitrage?

[@nada347_]

Liked and subscribed. Thank you for explaining these so effectively.

[@rolandbole5824]

I got hit by IL on the YOK/CKB 50/50 pool. One simple strategy against IL would be to provide LP to a value you are OK losing and take out any additional profits earned from yield farming weekly or at a frequency of your choice.

[@TheRollupCo]

Your channel is amazing, very interesting DeFi video

[@aaronsmith2929]

Could you ever have the opposite? Impermanent gain? Such that you receive more of the coin that is worth more in value and less of the lesser value coin after providing liquidity?

[@somers2020]

Only if both tokens go up about the same, I believe.

[@carljustinemosquida9614]

Hi, I wonder how did you learn this things, would you mind to point me to some books or other resources? That would be much appreciated. Anyway great video🔥, continue with your journey.

[@Finematics]

Multiple places, but the medium post that I linked in the video's description is one of the best. Thanks!

[@PrisonerZ3RO]

Best explanation EVER !!!!

[@OneTwoMark]

This is my first run of the video so im still hazy, will rewatch. But if you miss out on profits of a token going up in price, does that mean youre also safe from the losses of the token price going down?

[@katyaolivan6085]

Because of your vids, I understand everything better😃 thanks

[@Finematics]

Glad to hear that! :)

[@limeroundup]

Incredible. Best explanation ever!

[@Finematics]

thanks!

[@gurpreetsaini7644]

One can use Solver in excel to find out the revised amount of ETH and DAI shown at 3:30.

[@rohanmarwaha2526]

I have a question - say we have an LP with TokenX - USDT in 50-50 ratio. For sake of simplicity say price of TokenX is now 1$, I provide 10 LP tokens, so I staked 10 PUD and 10 USDT. now say price of TokenX goes up to 2$ and I unstake, how much PUD and how much USD will i get back?

[@kokoro1404]

thank you,, good job explaining,, now i can rest i think i am ok where my investments is.,, gracias

[@lucsu1428]

Wow, thanks for the explanation and the cool graphic!

[@captainpotato8966]

Love this channel so much, thankyou. So, one thing that confuses me a little.. in the impermanent loss example you use arbitrage as a result Ethereum's price rising. Does this mean that if the assets price is likely to rise (such as an asset in a bull market), the impermanent loss becomes increasingly large and risky? What about in a bear market? Thanks

[@philipkaelin9012]

Same mechanic just the other way around. Let‘s say ETH drops 50% on „the market“. Then arbitrage trader will come to the pool and sell their ETH from other sources to the pool, since the pool still provides a higher ETH price than the market.

[@ranadheerrannu]

@@philipkaelin9012 so if we withdraw now, do we get more ETH ? and less DAI ?

[@philipkaelin9012]

@@ranadheerrannu sorry for my late reply. It depends on the pool. Arbitrage only works if the pool you choose to arbitrage on is in inbalance with the market prices on the "normal" exchanges. Normaly a Pool gets into an inbalanced state when the market is more volatile than the pool reaction time or if a pool gets drained relatively fast compared to the market volatility. But it's a business of the fastest player, since pool provider want to have close marketprices and other arbitrageer wants to get the "free money" as well. As more efficient LPs get, as harder it will be to compete with sofisticated arbitrage systems.However, to finish your question: to identify pools which are inbalanced and a possible target to arbitrage you have to check every pool and see if the pool pricings are far off of the marketprices of other exchanges. In phases of high currency volatility and high exchange demand you will find such pools easier than in low volatility markets.

[@Cheezenuts]

Does the dollar amount you put in the pool (excluding slippage & interest accrued) remain the same regardless of positive or negative volatility of the asset? Or can the dollar amount that you initially pooled increase as long as there’s a 50/50 balance between the two assets?

[@KylanHurt]

Very high quality video. Thanks you for making!

[@gmanova]

what a fantastic explanation. thank you.

[@kostiantyn1632]

Could you please specify how exactly did you achieve 10,488.09 DAI and 19.07 ETH proportion? What formulas you were referring to? Thanks

[@Finematics]

The formulas are in the article linked in the description box. eth_price = token_liquidity_pool / eth_liquidity_pool

[@kostiantyn1632]

@@Finematics thank you! Looking forward to seeing the next video!

[@mohsenshahhosseini9758]

In binance liquid swap you will earn bnb for liquidity mining and transaction fees. What currency are transaction fees? Which one of the 2 currencies you added to the pool?

[@ic3b3rgi23]

Great Video man, like always 💯

[@Finematics]

Thanks!

[@HippiePajon]

Thank you!! I finally understand this topic

[@nadinounou]

Beautiful video thank you ♥️ If i am taking part in a liquidity mining pool with A/B, A and B being highly correlated, the risk is highly minimised right? if asset A grows 1000%, and asset B almost the same, then no impermanent loss if i got it well

[@Mike-cr1nc]

Thank you for this my friend, will recommend you !

[@Finematics]

Thank you too!

[@oveyshd]

Great videos, great illustration! Very educative. Thank you

[@Finematics]

Thanks! Glad they are helpful :)

[@jesseallan9006]

Excellent explanation. Thank you!

[@cryptomckey318]

Is the calculation the same for non stable coin pools like CAKE-BNB or TWT-BNB or it's a lot more riskier ? Thanks for your efforts. It helps a lot. Kudos!

[@bootedbiz74]

Stake your LP tokens in a farm, the APY should cover most of your impermanent loss, unless your dealing with high volatile tokens, stick to the main pools generally,

[@-.TS.-]

Definitely needed this!

[@lakemckenzie]

yeah you just got a sub!

[@remistoltz290]

This is SO clear, I really like your explanations and understood really easily ! Juste one question : can the impermanent loss start to take in the base capital or only in the possible earnings ?

[@Finematics]

thanks! yes it can change the initial ratio of your tokens - so it can affect your base capital

[@MAN221184]

One quick question at 3:31 how did you arrive at increased value of 10,488.09 Dai from 10,000 Dai?

[@free.breaker]

Dude love the drawing style

[@Finematics]

Thanks! :)

[@viurnne]

great lengthy detail explanations

[@stans.5072]

What if price of ETH in the pool goes Down?

[@mokiloke]

I was hoping he would show that also

[@niceman-dad3900]

You will lose less vs HODL plus get additional fees from trades.

[@JokerTheBond]

@@niceman-dad3900 That's not true. If the price of ETH goes down he would be holding more ETH than if he HODL, therefore he would have lost more. The impermanent loss is the same if the price of ETH goes up 10% against DAI, or if the price of DAI goes up 10% against ETH. In both cases you would be holding less of the asset that is worth more.

[@persahamanduniawi7323]

can u make video about DeFi based on BSC?

[@rezaxxx]

@@JokerTheBond Not sure , if ETH price goes down LP will hold more ETH and less Dai as i understand it. and DAI dont usually go up 10% :) But sure the LP could have bought more ETH if he/sha had the asset and traded at that moment ETH price goes down so that's that i guess.

[@MJ-vg1ot]

I understand the concept but something I can't get it, there is something called equilibrium, so if you have two coins, coin and usdt for example, and the first down in price you get more of that coins, and if the first coin went up, you get more of USD, my question, why you can't just buy more of the first coins with the USD you gained?

[@bespokespace2809]

fantastic video, thank you

[@Finematics]

thanks!

[@sebas0ify]

The video has an error around 4 min mark. The correct units should be DAI/ETH not ETH/DAI

[@tryxlr8m8]

Thank you, excellent explanation!

[@Finematics]

Glad it was helpful!

[@cod-24x74]

Now that UNI is rewarding UNI tokens for liquidity pools like WBTC/ETH I'm assuming that helps reduce the impact of impermanent loss on those pairs

[@Finematics]

Yes, especially if you either assume that BTC and ETH move up and down in tandem or if you don’t mind shifting your position between them

[@million786-s4x]

If u lock ur LP tokens, u get free UNI tokens,Not fee.....Fee is going to uniswap,unstake ur amount than u ll know..

[@cod-24x74]

@@million786-s4x doesn't the fee get accumulated based on the price movements

[@million786-s4x]

@@cod-24x74 U PROVIDED UR LPs to uniswap,now they hv ur fee,not u..u only get UNI reward

[@cod-24x74]

@@million786-s4x no the fees accumulate with the LP tokens so when you withdraw the lp tokens the fees those lp tokens accumulated are still there

[@ckwokhk]

in the video at time: 3:28 >> when price of ETH = 550, It's not explained how the number of DAI 10,488.09 be calculated?

[@AmadeoBrandsONDeFi]

I understand this issue ... only thing is lets say I want to be exposed to ETH and LEND ... LEND go's up like crazy then the ETH part will grow plus I will get fees and have ETH LEND exposior. For me impermentant loss in that case is less of an issue since the change that after 50% increase a big pullback would effect me less as well.

[@Finematics]

Hey Amadeo, yeah it all depends on the pair and your own strategy. As you mentioned maybe you want to slowly sell the mooning coin into something else. In this case impermanent loss wouldn't be bad for you.

[@1978nikolas]

I like inpermanet lost, ETH / renBTC pool has a lot of volatility attracting arbittage !!

[@parrishdominguez3495]

Can you please do an example where there is an APR? and The rewards you are earning is in another Asset. Example, STBL-USDC-LP. APR 10%, and you receive 5% ALGO in return and 5% STBL in return. How do you calculate Impermanent Loss?

[@dominationstipps701]

Good video! Thanks Ps: at 04:05 it should be 488,09 DAI/ETH

[@branislav3800]

Does this 3:00 mean that Uniswap will not change the price of the tokens if no one is making the trades with the pool? So as soon as someone makes a trade Uniswap will only then recalculate LP tokens?

[@sepman1]

You are amazing - 'Nuff said!

[@jluna231]

So its a perfect way to protect your principle and earn yield?

[@Enzwurm]

Why doesn't the LP get his 20ETH back? Is this measured by the percentage, you provided to the pool in the fisrt place or what? Also how ofted does it occur that such price differences between exchanges happen? And what does happen, if for example the price of one asset keeps rising? I mean on all exchanges. The equilibrium would then be broken.

[@445142]

@finematics how are this videos done? how many hours do you put in this videos? i like the style alot.

[@whatawonderfulworld6727]

Is there beside inpermanent loss also inpermanent profit? Also the video shows inpermanent loss while the total value went up. Isn’t that just less profit instead of loss?

[@christianrenner7663]

I hedge against impermanent loss with the cvi (crypto volatility index)

[@ORIGINALJRL]

How does a pair with a stable coin help prevent impermanent loss?

[@c78867886]

Can you explain how you get 10488.09 and 19.07? x y are two unknown variables why not 10347 and 18.81? 18.81*550 == 10347 as well.

[@Finematics]

constant_product = qty ETH * qty DAI = 20 * 10000 = 200,000 eth_liquidity_pool = sqrt(constant_product / eth_price) = sqrt(200,000/550)=sqrt(~363.64)=~19.07 All the formulas are in the article in the description box of the video. I hope this helps :)

[@KaiserKnight-bv3ru]

@@Finematics hahahaha well explained

[@derrickkkkkkkkkkkk]

great video! could you let me know the steps you used to calculate the new price of 524.83 ETH/DAI?

[@garg738]

VERY WELL EXPLIANED

[@Finematics]

thanks!

[@frankwills414]

I thought oracle services update Defi protocols on the real world price ? Why then would there be such a huge difference on the exchange and it won't be updated on the Defi protocol ?

[@themcfaceman]

Another great vid. This definitely crystallizes the concept of impermanent loss for me. Thanks!

[@Finematics]

Thanks! I’m glad it was helpful :)

[@themcfaceman]

@@Finematics It was! I would love to see you cover defi lending and borrowing or Aragon Court

[@Finematics]

defi lending and borrowing is on my list :)

[@kimau8541]

Thanks for great video. I wonder what happen when liquidity pool end? Will lost all liquidity or?

[@varadus9151]

I don't understand why the price of the DAI didn't change, I thought that the ETH would be more expensive and the DAI cheaper. why is it still 1$. And why is the value of the liquidity pool higher? isn't it supposed to stay the same. I am really confused can anyone help please? thanks.

[@raoulml1]

Thanks for the great content.

[@mastathek]

What's an arbitrager for an LP?

[@mariuslind9267]

I (think) I have a good grasp of IL, and it is easy to understand the % of IL if for example the value of eth tripples in a pool with usdt looking at the chart. I am having a harder time figuring out IL if eth goes down in value other than if it halves, which causes a 5,7% IL. How many percent drawdown in eth gives the same IL as an 4x in price of eth for instance. In other words; how do I translate 1.25x, 1.50x, 1.75x, 3x, 4x, 5x, into percentages of a drawdown?

[@rezaxxx]

Great video, thank you.

[@pablojarrin6924]

Hello. What would happen if I enter a pool with 2 non stable tokens ( eth and uni) and they both increase the same proportion ex they both make 2X. I will have IL?

[@raylay2197]

In the example provided, when the price of ETH increased, does it mean that when we withdraw from the LP, we will still be making a profit since the value that is withdrawn is greater that the value that was deposited? Impermanent loss, in this example, would still be making profit, just that the profit is lesser than if the underlying dai/eth was held. However, it does not necessarily mean an absolute loss of the original value deposited, right? Learning loads here. Thanks!

[@SenpaiTorpidDOW]

Correct.

[@greatnes]

Wow! You're amazing. The effort you put into this video is helping thousands learn. I'm happy to be one of them.

[@Finematics]

Wow, thank you!

[@ethanfox9357]

So the loss is only verses the gain of the asset hodling. in the example the lp provider loses .93 eth but still gains 97% of that of the hodler strategy. id say thats still a good outcome considering the fee they also get. Am I missing something?

[@vitociciretti4674]

How do you calculate the quantitities post arbitrage to restore the equilibrium (i.e. to take away the arbitrage opportunity)?

[@jaithesuperstar]

Can we make permanent loss also buy liquidity pool?

[@Zharadeen]

I love your page so much

[@gdragon8059]

I still don't get the incentive of being liquid providers. Since cryptos are very volatile, the pair you will put will always be not 50/50 at a certain time. Surely you'll have impermanent loss, I don't think 0.3 fees from buyers and sellers and amount of tokens you get from the farm would suffice on your impermanent loss. Can someone pls explain this, how would liquid providers benefit on this?

[@StevenCannon-p1t]

7:08 am I would like to know the extent of risks in LP's

[@genebowler8020]

Wouldn't the answer to that be is just to hold till prices don't move on a day letting all platforms catch up to each other evening everything out?