Why Impermanent Loss Happens in a SushiSwap Pool

Impermanent loss is the value a liquidity provider gives up when a pool’s changing token mix is worth less than simply holding the same tokens. In a standard SushiSwap pool, the mix shifts as traders buy one token and sell the other, so a price move can leave a provider with more of the token that fell in value.

The loss is measured against holding, not against the amount originally deposited: a position can rise in dollar value and still have impermanent loss. For a broader account of pool participation and trading, see this guide to sushiswap.

How does impermanent loss arise?

In a constant-product pool, the reserves of two tokens adjust to keep their product roughly constant, while arbitrage trades bring the pool price closer to the wider market price. When one token’s market price rises, arbitrageurs buy it from the pool, leaving liquidity providers with less of it and more of the other token.

Consider a hypothetical 50/50 pool with 1 ETH and 2,000 USDC, when ETH is worth $2,000. If ETH doubles to $4,000 and the pool tracks that price, it would hold about 0.707 ETH and 2,828 USDC, worth about $5,657 combined; keeping the original tokens would be worth $6,000. The roughly $343 gap, or 5.7% of the hold value, is impermanent loss before fees.

How large can impermanent loss become?

The gap depends on how far the token prices move relative to each other, not on whether both tokens rise or fall in dollar terms. A small relative move usually creates a smaller gap; a larger move creates a larger one, and a reversal toward the starting price can reduce it while the position remains in the pool.

• Similar price movement between the two tokens tends to limit the reserve shift.
• A sharp rise in one token leaves the provider with fewer units of it than a holder would keep.
• A sharp fall creates the reverse mix: more units of the falling token and fewer of the other.

These comparisons assume a simple pool with equal-value deposits, no fees, and no other changes. Different pool designs or deposit ratios can change the calculation.

Can trading fees cover impermanent loss?

Fees can offset the gap, but they do not guarantee a better result than holding. A provider’s outcome depends on trading activity, the fee share earned, price movement, and any pool-specific costs or incentives.

Before supplying tokens, compare the likely fee income with the risk of a large relative price move, and check the pool’s token pair and deposit requirements. When the position is withdrawn, the provider receives the pool’s current token mix, making the result against holding concrete.