What Is the Difference in Impermanent Loss Calculation for a Standard Pool versus a Concentrated Pool?
In a standard pool, IL is calculated based on the divergence of the final price ratio from the initial ratio, spread across the entire price range. In a concentrated pool, the IL calculation is more complex.
It is only calculated relative to the price movement within the defined range, and the IL becomes 100% (relative to the deployed capital) once the price moves outside the range, as the position is entirely in the less valuable asset.
Glossar
Impermanent Loss Calculation
Divergence ⎊ ⎊ Impermanent loss calculation, within automated market makers, quantifies the difference between holding assets versus providing liquidity; it arises from price fluctuations relative to the initial deposit ratio, impacting portfolio value.
Concentrated Pool
Liquidity ⎊ A concentrated pool, particularly within an Automated Market Maker (AMM) on a decentralized exchange, refers to a liquidity provision model where capital is allocated within a narrow, user-defined price range.
Concentrated Liquidity
Allocation ⎊ Concentrated Liquidity represents a strategic deployment of capital within automated market makers, notably on decentralized exchanges, shifting from a uniform distribution to a targeted provision around specific price ranges.