Why Impermanent Loss Can Shrink Your Pool Return

Impermanent loss can cut a liquidity provider’s return when token prices move, because a pool changes how much of each token it holds. A liquidity provider, or LP, deposits tokens so traders can swap them and earns a share of trading fees. But the value of that position can end up lower than if the LP had simply kept the same tokens.

For example, imagine an LP deposits one ETH and 1,000 USDC when ETH is worth $1,000. If ETH’s price doubles, a basic constant-product pool—one that adjusts token balances to keep their product steady—would hold about 0.71 ETH and 1,414 USDC. Together they are worth about $2,828. Keeping the original tokens would leave the LP with $3,000. The roughly $172 gap is impermanent loss, before fees.

The gap is a comparison with holding, not necessarily a loss in dollar terms: the pool position is worth more than the original $2,000 deposit. For a fuller look at how different SpookySwap options fit different needs, see our guide. Pool choices can shape how a position earns and how much attention it needs.

Why does the pool change its token mix?

When traders buy one token from a pool, they add the other token in exchange. The pool’s pricing rule adjusts the balance after each trade. If ETH rises against USDC elsewhere, traders can buy ETH from the pool at its lower price. Their trades leave the pool with less ETH and more USDC. The pool keeps rebalancing as prices shift.

That means an LP does not keep a fixed pair of assets. When one token climbs, the pool tends to sell some of it; when it falls, the pool tends to accumulate more of it. The bigger and more lasting the price move, the more the pool’s mix can differ from the original deposit.

Do trading fees make up for impermanent loss?

They can, but they do not cancel it automatically. Fees add to the LP’s return, while impermanent loss measures the gap against holding. The result depends on how much trading happens, how much liquidity shares the fees, and how far prices move. A busy pool can still leave an LP behind if prices move sharply and fees are too small to cover the gap.

• Compare the current position’s value with the value of holding the original tokens.
• Include fees already earned in the pool return.
• Account for costs such as transaction fees and any cost to rebalance or withdraw.

When does impermanent loss become permanent?

The loss is called “impermanent” because the gap can narrow if prices return to where they were when the LP entered. That is not guaranteed. If the LP withdraws while the gap remains, the difference against holding is locked in at that point.

Some pools let LPs choose a price range for their deposits. A narrower range can put more capital to work near the current price, but the position may stop earning fees if the price leaves that range. For most readers, the useful test is simple: compare fees and other rewards with the value of holding the same tokens, and include the costs of managing the position. Higher fees are not proof of a better return.