Impermanent Loss

Impermanent Loss

Assets of a Liquidity pool can have strong price fluctuations. Usually, this is solved by arbitrators, which lead to a balanced pool. But, removing your assets from the pool at a time when the pool is not balanced can lead to permanent losses. In contrast, when the pool is unbalanced but you do not remove your assets it's just an impermanent loss.

Rule of thumb: The longer you wait, the lesser is the risk of a loss.

A detailed explanation of impermanent loss can be found here:

https://julianhosp.com/impermanent-loss-other-liquidity-mining-risks-explained/

A calculator to calculate the impermanent loss is here:

https://chitty27.pythonanywhere.com/

Example: You have a BTC-DFI Liquidity pool (Asset 1: BTC; Asset 2: DFI). The price of DFI doubles, while BTC is not changing of all. You should key in into the calculator:

Asset 1: 0

Asset 2: 100%

After hitting Calculate it will compute an impermanent loss of 5.72%.