Impermanent Loss

When you loan coin pairs to liquidity pools, you suffer impermanent loss as the prices of the two coins diverge.

Most liquidity pools work on a constant product formula. You are entitled to withdraw coins equal to the ratio in value of your initial deposit, not your original coins.

As the cost of the tokens diverges, the more impermanent loss you accure.

Example: You lend $1000 in liquidity, Token A is worth 20, Token B is worth 25 (50 A = $500, 40 B = $500)

When you cash out, Token B mooned, is now worth 50. A is still worth 20. You would get back 1,414.21 worth of tokens, which would have been worth $1500 if you would have held the tokens. You suffered an impermanent loss of 5.72%. You can run these calculations on [] (