Proven Strategies to Minimize Impermanent Loss While Yield Farming

Impermanent loss is a risk faced by the liquidity providers in yield farming. This article will look into the strategies to minimize impermanent loss while yield farming, but before that, we need to understand yield farming and impermanent loss.

Yield farming has attained the position of one of the most popular ways to earn passive income in decentralized finance (DeFi). It provides liquidity to automated market makers, allowing them to earn trading fees and token rewards. However, this also comes with a cost, especially for newcomers, as impermanent loss.

Impermanent loss is often underestimated as it does not always show up immediately. Impermanent loss cannot be avoided either, but with proper guidance and strategy, users can understand it and model it and eventually minimize its impact.

This guide will provide you with simple explanations, mathematics, tools, and practical strategies to help you protect capital and earn yield.

Impermanent Loss 101 — What It Really Is (and Isn’t)

Before using any advanced strategies, it is pivotal to grasp the concept of what impermanent loss actually means. What it is and what it is not. This section lays the foundation for everything else in yield farming before moving on to the use of advanced strategies to minimize impermanent loss.

What Is Impermanent Loss?

Impermanent loss (IL) refers to the difference in value between:

1. What your assets would be worth if you simply held them (“HODL”), and 
2. What your assets are worth after being used to provide liquidity in an AMM pool.  

That difference, when unfavorable, is called impermanent loss.

Here’s the most important part: impermanent loss happens because your token amounts change while they’re inside a liquidity pool.

When you deposit two tokens into a pool, you’re essentially agreeing to provide liquidity at whatever ratio the AMM requires. As prices move in the external market, arbitrage trading shifts the pool’s internal token ratios. This means:

• You may end up with less of the token that went up in price, and
• More of the tokens that lagged or fell

Now the question is, why is it called “impermanent”? In a nutshell, the loss isn't realized until you withdraw your liquidity. If the price divergence reverses while your funds remain in the pool, IL can shrink, and to great lengths over time. 

However, one of the biggest misconceptions is that impermanent loss magically “goes away.” But in reality:

• Once you withdraw, IL becomes permanent, because you lock in the pool’s token ratios at that moment
• If prices never revert, that IL is effectively permanent, even if you stay in the pool

Another crucial nuance: impermanent loss is about price divergence, not just price direction. A pool suffers the same IL whether some asset doubles or halves. What matters is how far apart their prices move relative to each other.

How AMMs Create Impermanent Loss (X × Y = K)

If you want to understand where the pain of impermanent loss comes from, we have to start by seeing how Automated Market Makers (AMMs) even manage to set prices in the first place. The vast majority of them rely on this one super-important piece of math: the constant product formula.

x × y=k 

Where:

x = amount of Token A

y = amount of Token B

k = constant

This formula ensures that after every trade, the product of the two token reserves remains the same. But this also means that when the external price of one token changes, arbitrageurs step in to exploit the difference, forcing the AMM to rebalance, as per the Uniswap v2 whitepaper issued in 2020.

Now, let's see how this creates IL. 

Let’s say you deposit ETH and USDC into a 50/50 liquidity pool. 

1. ETH price rises on external markets.
2. The pool’s ETH is now “cheap” relative to the market.
3. Arbitrage traders buy ETH from the pool until its price matches the external market.
4. As a result, the pool ends up with less ETH and more USDC.

And since you own a percentage of the pool, you now own:

1. Less of the appreciating asset (ETH)
2. More of the stable or underperforming asset (USDC)

This is the core mechanism behind impermanent loss.

Let's examine why 50/50 pools have the most exposure.

Traditional AMMs require a strict balance between the two assets. Whenever one asset moves sharply, the pool aggressively rebalances, effectively forcing LPs to sell the winner and buy the loser.

This means:

• Higher volatility → higher IL
• Wider price divergence → exponentially higher IL

Real Impermanent Loss Calculation Example (Step-by-Step)

Theory can only take you so far, but to grasp the concept of impermanent loss properly, we need to see the numbers. This section will walk you through an actual IL example, based on simple math, allowing you to see exactly how much value you lose to rebalancing.

Suppose you deposit into an ETH/USDC 50/50 pool:

1 ETH at $2,000 and 2,000 USDC at $2,000, resulting in a total deposit of $4,000.

How will this affect the price movement? ETH doubles from $2,000 → $4,000.

What happens inside a pool? Because the pool must maintain X × Y = K, arbitrage traders rebalance it. The new ratio ensures you withdraw less ETH than you deposited and withdraw more USDC than you deposited.

Here, after the price doubling, your share of the pool approximately becomes:

• 0.707 ETH
• 2,828 USDC

This is a standard result of the constant-product formula in a 2× divergence scenario. 

Now let's take a look at the value upon withdrawal. 

Calculate the new values:

• 0.707 ETH × $4,000 = $2,828
• 2,828 USDC = $2,828
• Total = $5,656

What you would have with HODLing: 

If you held your tokens:

• 1 ETH × $4,000 = $4,000
• 2,000 USDC = $2,000
• Total = $6,000

Difference:

$6,000 − $5,656 = $344 lost

Percentage IL:

344 ÷ 6,000 ≈ 5.7% IL

So even though your LP position grew in dollar terms, you still lag behind a basic HODL strategy by nearly 6%.

Let's briefly examine more daring maneuvers.

If ETH increased 5×, IL would not simply “scale linearly.” It grows exponentially because AMM pools rebalance more aggressively as assets diverge.

Simply put, small price movements → small IL, big price movements → potentially huge IL

And once you withdraw, this loss becomes locked in.

Impermanent Loss at Different Price Changes (Quick Reference Table)

Here is the classic IL table used throughout DeFi to estimate losses at different price divergences:

The key takeaway from this table is that IL is symmetric.

A 2× price increase or a 50% price drop yields similar IL because what matters is divergence, not direction.

Later in this guide, you will also see how fee income, rewards, and advanced positioning can offset or even outweigh these numbers.

Can Impermanent Loss Be Avoided?

This section of the guide will look into the strategies, tools and the myth, analyzing whether impermanent loss can be avoided.

The Short Answer — No, But It Can Be Managed

In short, you can’t fully eliminate impermanent loss if the relative price of the two assets in a pool changes. IL is a direct consequence of being in a rebalancing AMM. As prices diverge, the pool forces you to hold a changing mix of tokens, and that mechanically creates the gap compared with an unpaired HODL.

That said, IL is actually super manageable. You get to decide everything—where you dive in, when you start, and exactly how much risk you're willing to take on.

What does this mean practically? It means you need to be smart about your choices:

• Pick pairs that aren't likely to diverge wildly. (Lower risk, better sleep.)
• Look for protocols that actually compensate their Liquidity Providers (LPs). Get paid for your service!
• Consider using concentrated or actively managed liquidity pools where that strategy makes sense for the assets.
• Most importantly, size your positions correctly so they genuinely fit your personal risk profile. Don't overextend.

The IL Controversy — Is It an Overrated Metric?

There’s a lively debate in DeFi: is impermanent loss the right way to think about LP returns? Critics claim that IL is a narrow comparison; it pits LP returns against a hypothetical, perfect HODL that many people would not have actually executed. The metric ignores fees earned, token rewards, and active management.

So when is IL a real problem?

• During large, trending moves (e.g., 2×–5× and beyond) — IL grows quickly as divergence widens.
• In low-fee, low-volume pools — fees are what offset IL; if volume is tiny relative to TVL, fee income won’t cover it.
• If you’re locked in or can’t react — IL that can’t be managed because of locks or unwillingness to rebalance becomes de facto permanent.

And when does IL matter less?

• Range-bound markets, small oscillations around a price, deliver steady fee income and small IL.
• High-volume pools where fees + rewards produce a meaningful yield that often outpaces IL.
• When you actively manage or hedge the position.  

Your Personal IL Threshold

Before doing anything, decide what level of IL you’re willing to tolerate. That will differ by strategy and time horizon, but a simple framework:

• Max acceptable IL: e.g., 5–10% for conservative LPs; 15–30% for more aggressive strategies.
• Expected fee + reward APY: make a conservative estimate (don’t rely on temporary farm incentives).
• Time horizon: short-term LPing (days/weeks) needs different thresholds than multi-month positions.

Write these down and treat them as rules. They’ll guide pair selection, position sizing, and whether you hedge.

Strategy #1 — Choose Low-Volatility and Correlated Pairs

Putting your capital where divergence risk is smallest is the simplest, often most effective, IL mitigation strategy. It’s low-glamour, but it works.

Stablecoin Pools — Minimal IL, Lower but Safer Returns

Stablecoin pools (e.g., USDC/DAI) have near-zero price divergence unless one of the stables depegs. Because both tokens aim to remain pegged to the same unit (USD), the core driver of IL, price divergence, is minimized.

For a better understanding of stablecoins and USDC vs. USDT, check out our detailed analysis on the topic.

Stable pools historically offer lower base fee APYs than volatile pairs, because trades have low slippage and smaller spreads. However, when combined with gauge emissions (Curve-style CRV incentives) or UI-provided liquidity mining, the total APY can be attractive for risk-averse LPs. Use live dashboards (DeFiLlama, Curve docs) to check current returns in real time.

Curve’s 3Pool (USDC/USDT/DAI), Uniswap v3 concentrated USDC/USDT pools, and other stable-focused platforms. Curve is designed specifically to optimize low-slippage stable swaps and capture fee revenue with minimal divergence risk.

Risks to watch:

• Depeg risk: A large depeg event can produce catastrophic IL. Rare, but possible.
• Smart contract risk: Any protocol bug or exploit affects TVL and your funds.
• Concentration of protocol risk, e.g., incentives or governance changes that alter returns.

Stable pools are ideal when you want a predictable, low-volatility yield and minimal IL exposure.

Correlated Pairs — ETH/stETH, BTC/wBTC and Similar

Let's start with what correlated means. Assets that track each other closely reduce divergence. Examples include tokenized versions of the same underlying (wBTC vs BTC) or liquid staking derivatives (stETH vs ETH) that generally move in lockstep (though with some tracking error).

The next question arises is why correlation helps. When two tokens move together, rebalancing trades are limited and IL shrinks — often to single-digit or sub-1% territory for modest moves.

Examples & tradeoffs:

• ETH/stETH (or ETH/rETH): Lower IL because both tokens track ETH, but watch for protocol-specific risks (staking protocol slashing, peg divergence after liquid staking incidents).
• BTC/wBTC: Very tightly correlated; IL is usually minimal. However, bridging or custodial risks exist (wBTC is minted by custodians).

Correlation reduces IL but can also reduce yield compared with exotic pairs that capture high volatility fees. As always, check historical tracking error and TVL before committing.

Pairs and Conditions to Avoid

A short checklist of what to avoid when your primary goal is minimizing IL: 

• New token launches & meme coins. Extreme, unpredictable divergence.
• Low-volume pools relative to TVL. Fee income won’t offset IL. Use on-chain volume-to TVL metrics from DeFi dashboards. 
• Tokens with large scheduled emissions or unknown tokenomics. Sudden dumps of reward tokens can crush returns.
• Markets with strong single-asset trending (e.g., parabolic rallies), IL grows fastest during these conditions.

Simple habit: Before LPing, check 24h volume vs TVL, token age, and whether external events (e.g., upgrades, halving) could force divergence.

Strategy #2 — Use Protocols with Built-In IL Mitigation

Some protocols recognized IL as a user pain point and built features to mitigate it. They aren't without a cost, but the protection can be appealing to some LPs.

Bancor’s Impermanent Loss Protection (Concept & Caveats)

Bancor historically offered an IL protection mechanism where the protocol compensated LPs for IL over time (originally vesting to full protection after ~100 days in earlier versions). Newer Bancor iterations have changed mechanics, including introducing exit waits and reworking how BNT (Bancor’s token) is used to cover imbalances. Read Bancor's own support docs to confirm the current mechanism and withdrawal terms. 

Why this helps: If you’re single-sided staking or using protected pools, you’re less exposed to dramatic IL, the protocol absorbs some of that cost through its treasury or token economics.

Trade-offs & caveats:

• Lock-in / vesting: Protection often increases the longer you stay in; early withdrawals may forgo full compensation.
• Protocol token risk: Bancor’s mechanism historically used BNT or protocol economics to cover shortfalls, if the protocol suffers, the protection may be weaker.
• Operational history: Bancor has evolved (and paused withdrawals historically). Always check the latest support docs before committing.

Bottom line: Bancor-style protection can be powerful, especially for single-sided exposure, but verify current terms and smart-contract risks.

Thorchain's Subsidy Model

Thorchain historically subsidized LPs via block rewards and liquidity incentives drawn from the protocol reserve. These rewards can materially offset IL in the early years of incentives, though they’re often planned to decline over time.

Where it works well: Moderate volatility pairs with decent volume — the combination of fees + continuous block incentives can exceed IL, especially while incentives are high.

Where it struggles: During extreme, sustained divergence, emission-based compensation can be insufficient. Also, cross-chain security and “sweeper” attack vectors are non-trivial risks unique to Thorchain-style designs.

Other IL-Mitigation Approaches

Here's a quick look at some different options.

• Asymmetric / single-sided pools: Some protocols let you deposit one token and they handle the pairing, implicitly shifting IL exposure. Bancor has offered variants of this.
• Managed vaults & active vaults: Platforms like Yearn, Gamma, and other active managers use strategies (concentrated ranges, rebalancing) to optimize fee capture and limit IL risk. See Gamma/Revert for manager tools and analytics.
• DeFi insurance: Some insurance or cover protocols offer protection against smart contract failure or extreme IL, but these add cost and counterparty risk.

Important caveat

None of these removes the economic cost of divergence. They shift who bears it (the protocol’s tokenomics, the insurer, or the emissions treasury). Always ask: who pays for the protection, and under what conditions?

To understand DeFi insurance in detail, take a look at our guide on the topic.

Strategy #3 — Leverage Concentrated Liquidity (Advanced Users)

Concentrated liquidity is one of the most powerful, but also most misunderstood, tools in modern DeFi. It arrived with Uniswap v3 and changed LPing from a passive activity into something closer to active portfolio management. When used correctly, it can balloon your fee earnings relative to your capital deployed. But it also magnifies risks if you set your range poorly.

Why Concentrated Liquidity Increases Fee Earnings

Traditional AMMs (like Uniswap v2 or SushiSwap) spread your liquidity uniformly across the entire price curve. That means 90%+ of your liquidity often sits unused, especially during stable or trending markets where trading occurs in a narrow band.

Concentrated liquidity flips that model:

You specify a price range where you want your liquidity to be active.
If the price trades inside that band, you earn more fees because your liquidity density is higher.

In other words:

• Narrower range = more concentrated liquidity = higher fee APY
• Wider range = more passive exposure = lower fee APY but safer

This creates an opportunity for advanced LPs: if you can identify where the price is likely to remain (e.g., during sideways chop, support/resistance areas, or stable correlations), you can earn significantly more than a passive LP. But as they say, every advantage has a cost.

Choosing Effective Price Ranges

A concentrated position works brilliantly as long as the price stays inside your band. But once the price moves outside:

• Your position converts fully to one token
• You stop earning fees
• IL becomes realized relative to the unpaired asset
• You must “re-range” manually if you want to start earning again

This is where most beginners lose money: they set ranges too tight in markets that are too volatile, go out of range quickly, and end up with a poor final asset mix. 

Concentrated liquidity works best when:

• The pair is highly correlated (ETH/stETH)
• Volatility is low
• The market is ranging
• You monitor your LP actively

It’s less effective in:

• Trending markets
• Meme-coin volatility
• Low-liquidity altcoin pools
• Periods of major macro events

Think of it as a tool for range traders, not set-and-forget investors.

Managing Out-of-Range Positions

These platforms monitor your position, rebalance your ranges, and determine optimal widths based on volatility and liquidity flows. They are essentially “strategized LP vaults.” 

What they offer:

• Predefined active management strategies
• Automatic rebalancing when out of range
• Volatility-based range selection
• Analytics on expected IL and fee capture

The trade-off is fees; automated vaults charge performance or management fees, which eat into returns. But for most users, the improved uptime and avoided mistakes outweigh the cost.

This is why concentrated liquidity is considered “advanced," not because it’s conceptually hard, but because managing it emotionally and mechanically takes practice.

Strategy #4 — Hedge Your Liquidity Position

Hedging is often seen as “pro-only,” but in reality, simple hedges are accessible to almost any LP and can dramatically reduce your IL risk. The key is understanding what you’re hedging against.

When you LP into a volatile pair, your biggest risk is relative divergence. That means the two tokens drift apart in price. Hedging helps neutralize that divergence so that IL shrinks, and your returns are driven more by fees than by market direction.

One of the most reliable ways to beat impermanent loss is to earn more in fees and rewards than you lose from price divergence. This strategy works best when you focus on pools with strong, steady trading volume and pair them with additional incentives such as liquidity mining rewards.

Hunting High-Volume, High-Fee Pools

Fee APY is the strongest natural offset to impermanent loss. The more trading activity a pool gets, the more fees you earn. Platforms like DeFiLlama and Dune dashboards can help you find pools with steady week-to-week volume instead of random spikes. It also matters which fee tier you use: pairs with low volatility usually perform better with lower fees, while pairs that swing more in price often make higher fees worthwhile because they capture larger spreads.

Net Returns: Fee APY Versus Impermanent Loss

Think in simple terms:

Total LP PnL = Fees + Rewards − IL ± Token Price Change

For example, If IL comes to around 5.7% in a month but the pool pays you 10% in fees and incentives, you still walk away with a net gain of roughly 4.3%.

Break-even points change depending on volatility and fee tier, but the idea stays the same. Good pools with healthy volume tend to outrun IL over time. Compounding your fees and staying in a reliable pool for longer periods can shift returns even further in your favor.

Liquidity Mining and Bonus Rewards

Extra rewards, whether farm tokens, governance tokens, or protocol incentives, can push your APY higher. The trade-off is that many of these tokens are inflationary and can drop in value quickly.

Decide upfront how you want to handle these bonuses: sell them regularly to lock in your yield, or hold onto them if you believe in the project’s long-term potential.

To see your real performance, always calculate your total APY across fees, base rewards, and any bonus tokens. This gives you a clearer picture of whether you’re actually beating IL or just stacking volatile rewards.

Strategy #5 — Use Volatility Harvesting & Rebalancing Techniques

This section will guide you on how to use volatility harvesting and rebalancing techniques.

The Split-Allocation Strategy

A standard approach is to divide holdings between passive ownership and liquidity provision.

Example structure: 50% retained as the underlying asset, 50% deployed into the LP position.

This allocation mathematically reduces impermanent-loss exposure. If full allocation (100%) produces X IL, a 50/50 split limits realized IL to approximately half of X, while still capturing fee revenue.

This method also produces behavioral benefits: a portion of the asset remains unencumbered, maintaining upside exposure and reducing regret associated with directional price moves.

Diversifying Across Pools and Protocols

A risk-adjusted LP portfolio distributes positions across multiple pool types and platforms.

Typical distribution categories:

• Stablecoin pools.
• Correlated asset pairs.
• One or two higher-risk pools if the user intends to pursue elevated returns.

Diversification stabilizes portfolio-level results. IL from one pool may be offset by higher fee income or rewards from others.

Rebalancing can be performed on a weekly or monthly cadence, focusing on the overall portfolio rather than evaluating each pool in isolation.

When Unbalanced Pool Ratios Make Sense (80/20, 60/40)

Weighted pools, such as those on Balancer, allow liquidity providers to set non-50/50 allocations (e.g., 80/20 or 60/40). These structures reduce exposure to volatile assets.

Example: an 80/20 ETH/ALT pool constrains ALT-related IL since only 20% of the liquidity is tied to the higher-volatility asset.

Conceptual comparison:

• In a 50/50 pool, a 50% decline in the volatile asset forces a significant asset-rebalancing loss.
• In an 80/20 configuration, the same price decline impacts only the 20% portion, resulting in materially lower IL.

Trade-off: reduced IL comes with lower fee generation, as fewer rebalancing trades occur due to the heavier weighting on the dominant asset.

Strategy #6 — Timing, Monitoring & Automation

Even the best strategy fails without monitoring. Impermanent loss isn’t “bad” — it’s simply a predictable outcome of AMM mechanics. But unmonitored IL becomes a permanent loss. Here’s how to stay ahead of trouble.

Timing Your Entry and Exit

Liquidity-provision efficiency increases when deployed during range-bound and lower-volatility environments. These conditions reduce directional divergence between paired assets and yield more predictable fee accrual.

Avoid entering liquidity positions during:

• Major announcements, protocol upgrades, forks, airdrops, policy shifts.
• Strong, persistent directional trends in either asset.

Exit logic is typically defined using:

• Pre-determined dollar-based profit targets.
• Market-based triggers like range breakdowns or sudden volatility spikes can signal that conditions are turning unfavorable for IL.

Monitoring Tools, Dashboards & Alerts

Operational oversight requires structured monitoring. Impermanent-loss calculators allow parameterized inputs for scenario evaluation.
Useful platforms for portfolio visualization include:

• DeFiLlama
• Revert
• Zapper / DeBank
   

Alert configurations should track:

• Price deviation thresholds beyond X%.
• Declines in pool volume.
• IL estimates exceeding predefined tolerance levels.
   

Hedging Impermanent Loss (Advanced)

Directional risk can be offset using derivatives.

Examples:

• Shorting the volatile asset via perpetuals/futures while LP’ing in an ETH/stable pool.
• Utilizing options structures or covered strategies to neutralize exposure.

A cost-benefit assessment is essential. Excessive hedge costs may exceed the IL risk, reducing net yield. This category is strictly for advanced users with derivatives proficiency.

When You Should NOT Provide Liquidity

This is one of the most important sections, and also one that most yield farming guides avoid. Impermanent loss is not just a mathematical idea; it is a behavioral challenge, a time-management challenge, and a risk-management challenge. Many people lose money not because the strategy itself was flawed, but because they LP’d during the wrong market conditions, with the wrong tokens, or under the wrong personal circumstances.

Below are the scenarios where LPing is simply a bad idea, no matter how attractive the APY is.

Market Conditions That Make LPing Unwise

Liquidity provision is fundamentally a bet on relative, range-bound volatility — not on straight-line price trends. When the market moves violently in one direction, IL becomes extremely costly because the pool constantly sells your outperforming token.

Strong bull trends (one asset outperforming the other)
If ETH goes on a 3x run while USDC stays flat, a 50/50 ETH/USDC pool will sell your ETH the entire way up. This is the most punishing environment for LPs.

Strong bear trends (one asset dumps hard)

If one token collapses (e.g., -50% to -90%), an LP ends up overweight in the collapsing asset as the AMM rebalances.

High implied volatility events

Avoid LPing around:

• FOMC meetings
• CPI announcements
• Major token unlocks
• Protocol upgrades
• Airdrop farming hype
• Hard forks
• Regulatory news cycles

When volatility spikes, IL spikes with it.

Meme coin seasons or speculative mania

Meme coins and low-liquidity alts experience unpredictable intraday 20%–100% swings. Fees may look high, but IL is often far worse.

Pools with suspiciously high APY but low volume

If volume isn’t high enough to generate fees, APY numbers are often inflated by unsustainable token emissions — and IL will eat through your position faster than rewards accumulate.

Personal Situations That Don’t Fit LPing

Even if the market is perfect for LPing, your personal context may not be.

You can’t monitor positions at least occasionally

LPing is NOT set-and-forget, especially when dealing with volatile pairs or concentrated liquidity. If you can’t check your position weekly — or daily for advanced strategies — you may be better off staking or lending instead.

You need the funds in the short term

If you need liquidity in the next 3–6 months, avoid LPing. IL can become permanent if you withdraw during a period of divergence.

Your risk tolerance is low 

If seeing your LP position lose value — even temporarily — causes stress or regret, stick to: 

• Stablecoin pools
• Lending
• Staking
• Or simply HODLing

LPing involves fluctuating balances and dynamic market exposure. It’s not emotionally suitable for everyone.

You’re not comfortable with technical DeFi interactions

LPing can involve:

• Setting ranges
• Managing NFT positions (Uniswap v3)
• Interacting with vaults
• Monitoring rebalances
• Handling gas fees

If any of these steps feel overwhelming, use automated vaults or simpler yield strategies first.

Lower-IL Alternatives to Consider

If LPing doesn’t match your market environment or personal situation, these options have lower risk and zero IL.

Single-sided staking (Lido, Rocket Pool, Frax ETH+, etc.)

Earn yield from:

• Staking rewards
• Validator income

No IL since you only hold one asset.

Lending platforms (Aave, Compound, Spark)

Earn stable, predictable interest from borrowers. Risk is mostly:

• Smart contract
• Collateral volatility
• Protocol-level events

No AMM exposure = no IL.

Buying and holding (or DCA)

For many investors, the simplest strategy performs best long-term — especially during bull markets.

Yield-bearing stablecoins or RWA protocols

Real-world asset platforms (e.g., Ondo, Maker’s sDAI) offer 4–8% yields with no IL.

Is Yield Farming Worth the Impermanent Loss Risk for You?

This section helps readers make a final, rational decision. Yield farming is not about “high APY.” It’s about risk-adjusted returns. Here’s how to evaluate whether LPing fits your strategy and personality.

Comparing LP Returns Versus Simple Holding

To know whether LPing makes sense for you, track two numbers:

1. Your actual LP PnL (fees + rewards + your current asset value)
2. Your hypothetical HODL PnL (what you would have earned if you simply held the tokens)

Example scenario:

• You deposit $10,000 into a 50/50 pool
• After 6 months, your LP position is worth $12,000
• But a pure HODL of the same assets would now be worth $12,500

In this case:

• You earned $2,000
• IL was $500
• Your net performance vs HODL is –$500
• But you still made a profit because fees compensated for part of the divergence 

This is why many investors argue IL is overrated. LPing isn’t competing against “perfect hindsight HODL;" it’s competing against realistic alternatives.

If your goal is steady, market-neutral income, LPing may be a better fit than HODLing volatile assets.

The Risk-Reward Profile of Different LP Strategies

LP environments distribute along a risk spectrum:

• High-yield, high-IL pools.
• Stable or low-IL pools with lower nominal APY.

Risk-adjusted return involves APY relative to IL exposure, underlying volatility, and the required management effort. Strategy selection should match user expertise and willingness to manage positions actively.

A Simple Decision Framework

Low-risk, low-engagement users → stablecoin pools or no LP exposure.

Active, data-driven users comfortable with complexity → concentrated liquidity and hedged approaches.

Initial participation should be small. Early LP activity is best regarded as paid learning rather than guaranteed profit.

Best Practices & Common Mistakes for Long-Term Liquidity Providers

To wrap up, here are the most important best practices and pitfalls to avoid in your LP journey.

Start Small, Learn, Then Scale

The biggest mistake LPs make is going all-in before understanding IL dynamics.

Best practices:

• Start with $100–$500 test positions
• Track results manually
• Try different pairs and ranges
• Only scale once you’ve seen how IL behaves in real market cycles 

Think of early LPing as “tuition.” The lessons you pick up now will save you much more money down the road.

Stay Informed & Adapt

DeFi is not static. Protocols change emissions, fees, and incentives constantly. The best LPs stay flexible.

Ways to stay sharp:

• Follow protocol announcements
• Monitor reward schedules
• Watch TVL changes (they impact the fee share)
• Read dashboards from experienced LPs
• Adapt ranges when volatility changes
   

Yield farming is an evolving space. Stubborn LPs lose money; adaptive LPs win. To learn more about yield farming and DeFi yield farming platforms, take a look at our blog here.

Mistakes That Destroy LP Returns

These are the most common and most expensive LP mistakes.

Chasing high APY without checking volume

High APY with low trading volume is a trap. Without enough volume, you won’t earn the fees needed to offset IL.

Ignoring IL entirely

Many beginners deposit funds, check back weeks later, and are shocked to see losses. Always estimate IL before entering a pool.

Over-concentration on one protocol or token

Smart LPs spread positions across:

• Multiple pools
• Multiple protocols
• Multiple asset classes 

This protects you from black swan events.

Providing liquidity to risky or obscure tokens

New, low-liquidity tokens can crash 90% in days. AMMs will then rebalance your position into that collapsing asset — turning a dip into a catastrophic loss.

Not having an exit plan

Before you enter any LP position, write down:

• Your IL threshold
• Your target profit
• Conditions under which you will exit
• Monitoring frequency

Most LP losses occur because people wait too long to exit.