How Is Impermanent Loss Calculated?
Impermanent loss is calculated by comparing the value of the assets if they had been held outside the pool versus their current value within the pool. The calculation is based on the ratio of the two assets' prices at the time of deposit versus the time of withdrawal.
The common formula is derived from the constant product formula.
Glossar
Deposit
Collateral ⎊ A deposit, within cryptocurrency derivatives, frequently functions as collateral securing a financial obligation, mitigating counterparty risk through margin requirements and potential liquidation cascades.
Impermanent Loss
Exposure ⎊ Impermanent loss, a risk inherent in automated market maker (AMM) protocols and liquidity provision, arises from price divergence between assets deposited and their subsequent value upon withdrawal.