The formula to calculate the impermanent loss is:
\[ IL = \left( \frac{2 \cdot \sqrt{PRA \cdot PRB}}{PRA + PRB + 2} \right) - 1 \]
Where:
Impermanent loss occurs when the price of assets in a liquidity pool changes after a liquidity provider has deposited them into the pool. The loss is ‘impermanent’ because it can be recovered if the prices return to their original state at the time of deposit. It is a risk associated with providing liquidity in automated market maker (AMM) platforms.
Let's assume the following values:
Using the formula:
\[ IL = \left( \frac{2 \cdot \sqrt{1.2 \cdot 0.8}}{1.2 + 0.8 + 2} \right) - 1 \approx -0.5101 \]
The impermanent loss would be approximately -51.01%.
Let's assume the following values:
Using the formula:
\[ IL = \left( \frac{2 \cdot \sqrt{1.5 \cdot 0.5}}{1.5 + 0.5 + 2} \right) - 1 \approx -0.567 \]
The impermanent loss would be approximately -56.7%.
