Impermanent loss calculation: the formula and the gap

CryptoTicker has published an explainer on impermanent loss calculation, focusing on the formula used to estimate the effect and the gap between holding assets in a liquidity pool and holding them outside it.

Impermanent loss is a common consideration in automated market maker liquidity pools. It arises when the relative prices of two deposited assets change after liquidity is supplied. The term describes the difference between the value of a liquidity-provider position and the value the same assets could have had if they were simply held.

A widely used expression for impermanent loss compares the price-change ratio of the two assets with the pool position’s relative value: 2√r/(1+r) − 1, where r represents the relative price ratio. The result is generally presented as a percentage difference rather than as a standalone trading gain or loss.

The calculation illustrates the gap created by rebalancing within an automated market maker as prices move. Trading fees earned by liquidity providers can offset that gap, but they are separate from the impermanent-loss formula itself. The practical outcome depends on price movements, pool design and fee income.