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Impermanent loss (IL) describes the difference between providing liquidity and simply holding the deposited tokens. Orca also uses the term Divergence Loss, or DL, because it describes what causes the difference: the prices of the deposited assets diverge from their original ratio.
Impermanent loss is a relative comparison against holding the deposited tokens. It is not always an absolute loss compared with the original deposit value.

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What this guide covers

  • Why the term “impermanent loss” can be misleading
  • How IL works in AMMs and concentrated liquidity pools
  • When IL may become realized
  • How position range, price movement, and fees can affect outcomes

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What is impermanent loss?

Simple definition

The difference in value between providing liquidity and holding the deposited tokens in your wallet.

Key concept

IL is a relative comparison. It compares LP position value against the value of holding the same tokens.
In an AMM, IL can occur when the relative prices of your deposited assets change. If you withdraw at a different price ratio than when you deposited, your LP position value may be lower than the value of simply holding the same tokens.

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Why the name can be confusing

The term suggests the difference may reverse. In practice, IL only stops changing if prices return to the original ratio before withdrawal. If you withdraw while the price ratio is different, the difference is realized.
IL compares LPing to holding. A position can show IL compared with holding while still being worth more than the original deposit value.
Think of IL as an opportunity cost compared with holding, not necessarily as a loss from the original deposit.

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Example scenarios

For these examples, assume:
  • 1 USDC = $1
  • Initial SOL price: $200
  • Selected range: $160-$250
  • Liquidity provided: 2.5 SOL ($500) + 500 USDC = $1,000 total
These examples are simplified and do not include trading fees, rewards, slippage, transaction fees, taxes, or price movement during withdrawal.

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Scenario 1: Price moves down, then returns

1

Price drops to $170

If you withdraw at this point, the position may contain approximately:
  • 4.50 SOL, worth about $765
  • 130 USDC
  • Total value: about $896
2

Compare with holding

If you had simply held the original tokens:
  • 2.5 SOL, worth about $425
  • 500 USDC
  • Total value: about $925
Estimated IL at this selected price: about $29.
3

Price returns to $200

If the price returns to the original deposit price before withdrawal, the estimated LP position value may return closer to the original value, excluding fees, rewards, and costs.This illustrates path independence in a simplified AMM model: withdrawing at the same price ratio as deposit can reduce or remove IL compared with holding.
IL is realized when liquidity is withdrawn. If price does not return to the original ratio before withdrawal, the difference compared with holding may remain.

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Scenario 2: Position value can increase while still showing IL

1

Price rises to $250

If you withdraw at this point, the position may be worth approximately:
  • About $1,059 total
2

Compare with holding

If you had simply held the original tokens:
  • 2.5 SOL, worth about $625
  • 500 USDC
  • Total value: about $1,125
Estimated IL compared with holding: about $66.
3

Compare with original deposit

The original deposit value was $1,000.In this simplified example, the LP position is worth about $1,059, while holding would be worth about $1,125. This means the LP position value increased relative to the original deposit, but underperformed holding.
Trading fees and rewards, where applicable, can affect the final comparison. Fee and reward accrual are not guaranteed and depend on trading activity, liquidity range, reward availability, and market conditions.

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IL in concentrated liquidity pools

Concentrated liquidity can increase exposure to price movement because liquidity is allocated within a selected price range.
In concentrated liquidity pools, price movement can have a larger effect on token composition and position value because liquidity is concentrated within a selected range. Review range settings carefully before depositing.

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Key takeaways

IL is realized on withdrawal

IL is a relative difference compared with holding. It becomes realized when liquidity is withdrawn at a different price ratio.

IL is relative

IL compares LPing to holding. It is not always an absolute loss from the original deposit value.

Fees can affect outcomes

Fees and rewards may offset IL, but they are not guaranteed and depend on pool activity and conditions.

Range settings matter

Price range, time in range, and token composition all affect LP outcomes.

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Why Orca uses “Divergence Loss”

  • Divergence describes the underlying cause: asset prices move apart from their original ratio.
  • Impermanent can imply the difference will reverse, which is not guaranteed.
  • Loss should be understood relative to holding, not necessarily as an absolute loss.
Divergence Loss emphasizes that outcomes depend on price movement, withdrawal timing, token composition, fees, rewards, and position range.

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Reviewing IL risk

  • Wider ranges spread liquidity across more prices and may reduce sensitivity to price movement.
  • Narrower ranges concentrate liquidity and may increase sensitivity to price movement.
  • Range choice affects capital concentration, time in range, and token composition.
Trading volume, fee tier, reward availability, and time in range can affect whether fees and rewards offset IL. These values can change over time.
As price moves, a concentrated liquidity position can shift toward one token. If price moves outside the selected range, the position may become fully one-sided.
Before withdrawing or rebalancing, review current price, token composition, accrued fees, estimated IL, slippage, and transaction details.

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Important considerations

  • IL calculations are estimates and can vary depending on pool mechanics, position range, and withdrawal conditions.
  • Trading fees and rewards may reduce or offset IL, but they are not guaranteed.
  • Positions only accrue swap fees while liquidity is in range.
  • If price moves outside your selected range, your position may become fully one-sided.
  • Slippage, priority fees, network fees, and market movement can affect final withdrawal amounts.
  • This guide is informational only and does not provide financial advice.

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Conclusion

Impermanent loss, or divergence loss, is an important concept for liquidity providers. It describes the difference between providing liquidity and holding the deposited tokens as prices move. When reviewing a liquidity position, consider price divergence, range width, token composition, time in range, fees, rewards, and withdrawal conditions together.

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Next Steps

Position Simulator

Review estimated IL across different price scenarios

Liquidity Position Concepts

Review key concepts for liquidity positions

Create a Position

Learn how to create a liquidity position

Understanding Ticks and Fees

Learn how ticks and fees work in CLMMs