What is Impermanent Loss in Crypto? Impermanent loss is a risk that occurs when participating in DeFi liquidity pools. Let's take a closer look.
What is Impermanent Loss in Crypto?
It describes a situation in which you stake a token in a liquidity pool and makes a profit that is less than you would have made by simply holding the asset. It occurs when a token's market price changes, decreasing the value of the assets you deposited in the liquidity pool below their current market value. Your assets are more vulnerable to impermanent loss the higher this price change.
The user will have suffered a 5% impermanent loss, for instance, if the value of the assets in the pool drops by 10% but the value of the LP tokens only drops by 5%.
It shows how much higher the value of your assets would be if you just HODL instead of providing liquidity. This gap is “impermanent” because it is possible to close the gap if the token price returns to the former price. It's also important to note That impermanent loss does not take into account trading fees that investors earn for providing liquidity, which in many cases can negate any losses.
How to Calculate Impermanent Loss?
Calculating your exact loss might be a little tricky due to the complexity of some of its variables. But you can estimate your loss with the formula below:
Impermanent Loss = 2 * sqrt(price_ratio) / (1+price_ratio) – 1
The price ratio is the ratio between the token price at deposit and withdrawal.
What is Impermanent Loss in Crypto? How to Calculate Impermanent Loss? - Hopefully, this article can help you to get some knowledge.
