upoint.infoImpermanent loss describes the temporary loss of funds experienced by liquidity providers because of volatility in a trading pair. This also illustrates how much more money someone would have had if they simply held onto their assets instead of providing liquidity.
When the price of assets in the pool changes, impermanent losses occur. How to calculate the specific loss amount? Well, we can draw it in the chart. Please note that this chart does not include rewards earned by providing liquidity.
Through this chart, we can understand the loss caused by price changes compared to simply holding the assets in a wallet:
How do price changes affect impermanent loss?
Zero Impermanent Loss
- The prices of both tokens go up by the same percentage:
This is the ideal situation that all liquidity providers dream of. Impermanent loss is zero and the values of both tokens increase. Overall profit is maximized. - The prices of both tokens go down by the same percentage:
Although impermanent loss is zero, overall profit suffers as the values of tokens decrease.
As long as both prices increase or decrease at the same percentage, the impermanent loss is zero. Unfortunately in the real world, this is unlikely to happen all the time.
Simulated result with UPOINT Impermanent Loss Calculator 1:
Price A and Price B both increase from $1,000 to $2,000. Impermanent loss is zero.
Some Impermanent Losses
- The price of one token goes up or down while the price of the second token remains unchanged:
There will be some impermanent losses. The bigger the difference between the two percentages, the higher the IL. - The prices of both tokens go up by different percentages:
The bigger the difference between the two percentages, the higher the IL. - The prices of both tokens go down by different percentages:
The bigger the difference between the two percentages, the higher the IL.
Simulated result with UPOINT Impermanent Loss Calculator 1:
Price A increases from $1,000 to $2,000. Price B remains unchanged at $1,000. Impermanent loss is 8.579%.
Highest Impermanent Losses
The prices of both tokens go in the opposite direction. I.e., one price up and one price down. Compared to the previous case above, the impermanent loss is maximized.
Simulated result with UPOINT Impermanent Loss Calculator 1:
Price A increases from $1,000 to $2,000. Price B decreases from $1,000 to $500. Impermanent loss is 25%.
Lastly, do not forget that the overall profit depends on the duration liquidity is provided. Even if there is an impermanent loss, there might be an overall profit if the reward received is enough to cover the IL.