Easy to use calculator for impermanent loss for DeFi Farming and liquidity providers. Key in asset prices and calculate.
Impermanent loss describes the temporary loss of funds occasionally experienced by liquidity providers because of volatility in a trading pair. We have two different calculators: First calculator, you can compare current prices with future prices. Second calculator, you can specify the weighting and the change in percent.
Asset A: Percentage change in value of the first asset (since the liquidity was made available).
Asset B: Percentage change in value of the second asset (since the liquidity was made available).
Your impermanent loss is:
When you supply liquidity to a liquidity pool and the value of your acquired assets changes—becomes less than what you first invested in, you suffer an impermanent loss. The greater the change, the more vulnerable you are to temporary loss.
Pools with assets that stay within a narrow price range will be less vulnerable to temporary losses. Liquidity providers face a lower threat of temporary loss in this situation.
Liquidity providers often provide liquidity despite knowing about associated risks because the trading itself can be profitable. To put it into perspective, trading fees might compensate for temporary losses. Indeed, because of the trading fees, even pools on Uniswap that are highly susceptible to temporary loss can be lucrative.
Every trade that runs straight to liquidity providers is charged a fee of 0.3 percent by Uniswap. Even though a pool is substantially exposed to temporary loss, it might be advantageous to supply liquidity if there is a significant trading volume in that pool. This, however, is contingent on the protocol, the pool in question, the assets deposited, and many different circumstances.
When money is in a liquidity pool, it is vulnerable to an impermanent loss. This loss often occurs when the ratio of tokens in the liquidity pool becomes unbalanced.
On the other hand, an impermanent loss isn't realized until the tokens are removed from the liquidity pool. The value of your tokens in the liquidity pool versus the value of merely holding them is often used to compute this loss. Liquidity pools that use stable coins may be less vulnerable to temporary loss because of their price stability.
An impermanent loss occurs when a liquidity provider suffers a momentary loss due to a trading pair's volatility.
Decentralized finance is used to prevent temporary losses and incentivize liquidity suppliers. AMMs employ a system of stakeholders, in which liquidity providers are paid a portion of all trading fees, and users are rewarded with tokens that can only be redeemed on that particular platform, which can become extremely valuable commodities in and of themselves.
Let's take a look at Uniswap, a decentralized trading mechanism based on the Ethereum blockchain, to see how impermanent loss functions. This group of tokens must retain the sum value in Uniswap liquidity pools.
The overall worth of one token of the pool of Uniswap must always match the combined value of the other currency in the pool. The computerized pricing mechanism is based on sustaining the token pair's equal value relationship.
A Uniswap pool, for instance, might be 50 percent ETH and 50 percent DAI. When a trader uses Uniswap to exchange ETH and get DAI, the amount of ETH in the pool drops while the amount of DAI rises. In reaction to this shift in the quantity equilibrium, the Uniswap constant formula raises the value of ETH compared to DAI, bringing the worth of the pool's ETH back to the worth of the pool's DAI.
AMM systems provide trading fees to liquidity pools and providers and frequently transfer platform tokens to users to limit temporary loss within the decentralized banking ecosystem and motivate users to provide assets to liquidity pools. Every time a transaction happens on Uniswap, individuals offering liquidity get a 0.3 percent fee. More activity and instability imply more revenue for these providers. Liquidity providers can accrue fees if there is enough market volume on the system to prevent temporary losses.
AMMs have recently started using tokens to create reward systems for financial intermediaries. You can acquire UNI tokens on Uniswap by donating tokens to a dedicated Uniswap liquidity pool that distributes token incentives. You can earn BAL or CRV tokens by donating tokens to the correct pools respectively. These coins can be traded and utilized elsewhere in the decentralized financial environment. Charges and the value of incentive tokens can compensate for temporary losses and make a liquidity supplier lucrative.
However, timeliness and context play a big role in being a lucrative AMM liquidity supplier. If you give tokens to the correct liquidity pool during a period of multiple transactions, you can earn a lot of money.
Anyone who employs automated market makers has to understand impermanent loss since it helps in calculating when to begin and end contracts.
In general, despite price fluctuations, you will always experience some level of temporary loss when you partake in AMM-based processes. If asset prices rise, your stake will become more valuable, and if prices fall, your stake will lose more. Trading costs and yield farming come into play here since they offset temporary losses, making participation in the automated market maker process more beneficial than simply holding cryptocurrency.