What Is the Mathematical Formula for Calculating Impermanent Loss?
The most common formula to estimate impermanent loss is: IL = (2 sqrt(price_ratio)) / (1 + price_ratio) – 1. In this formula, 'price_ratio' represents the price of the token at the time of withdrawal divided by the price at the time of deposit.
This calculation gives the percentage of loss compared to simply holding the assets. It's crucial to remember this formula does not account for trading fees earned, which can offset the loss.
The calculation quantifies the divergence loss due to volatility between the two assets in the pool.
Glossar
Impermanent Loss Formula
Formula ⎊ The impermanent loss formula is a quantitative expression used to calculate the divergence loss incurred by a liquidity provider in an Automated Market Maker pool compared to simply holding the underlying assets.
Mathematical Formula
Pricing ⎊ Mathematical formulas are fundamental to the valuation of financial derivatives and the operation of decentralized protocols.
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.
Constant Product Formula
Formula ⎊ The Constant Product Formula, a cornerstone of Automated Market Makers (AMMs) prevalent in decentralized finance (DeFi), establishes a mathematical relationship ensuring liquidity pool balance.