Estimate impermanent loss before adding liquidity
Use the entry-to-current price ratio to estimate an LP position’s loss against holding, then assess fees, incentives and liquidity ranges separately.
The Blockheight Editors··3 min read
Estimate impermanent loss by comparing a pool position’s value with the value of simply holding the same tokens. If you are choosing between swapping and providing liquidity on BaseSwap, the BaseSwap guide to swaps versus pools covers which route fits your goal; the calculation below helps assess the liquidity side.
What formula estimates impermanent loss?
For a standard 50/50 constant-product pool, use the price ratio between withdrawal and deposit. Uniswap’s v2 returns documentation gives the estimate as 2 × √r ÷ (1 + r) − 1, where r is the token’s current price divided by its price when you entered.
The result is the pool’s value relative to holding, expressed as a percentage. If one token doubles in price, r is 2: the estimate is about −5.7%. That means the pool position is worth about 5.7% less than holding the original tokens, before fees or incentives; it does not mean the position necessarily lost money in dollar terms.
How do I calculate it before entering?
Choose a price move you want to test, then compare the pool outcome with holding. A spreadsheet or calculator can do the arithmetic; the key is to use the ratio of future price to entry price, not the dollar change itself.
- Record the pair’s current price and the amounts you plan to deposit.
- Choose one or more possible future prices for the volatile token, and divide each by its entry price to get r.
- Apply the formula to each ratio, then compare expected fees and incentives separately with the estimated gap.
For example, if the token rises from $1 to $2, enter 2 as r, not $1 or 100%. A price drop to half the entry price gives r = 0.5 and the same approximate loss in this model.
Does the estimate include fees or concentrated liquidity?
No. The formula estimates the difference from holding in a standard pool and excludes trading fees, rewards, deposit costs and price impact. Fees and incentives may offset that difference, but their future amounts depend on trading activity and pool rules.
Concentrated-liquidity positions need a range-specific estimate because capital is active only within chosen price bounds; crossing a boundary can leave the position in one token. Before LPing, check the pool’s pricing model, fee terms and range behavior, then test more than one price scenario. The estimate describes a comparison at those prices, not a forecast of returns; actual fees and future prices remain unknown.