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.