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Author: Admin | 2025-04-28
An example of impermanent loss might look like this.A DeFi user wishes to provide liquidity to an ETH/USDC pool. In order to provide liquidity, the must deposit equal values of both assets in the liquidity pool, given their current market priceIf the price of ETH is $1,500 when the liquidity provider is looking to deposit ETH in the pool, they would also need to contribute $1,500 worth of the USDC stablecoin for each ETH coin they depositIn this example, let’s say the liquidity provider deposits 2 ETH and 3,000 USDC into the ETH/USDC liquidity pool.Let’s also say that the liquidity pool holds 40 ETH and 60,000 USDC in total, meaning the user's deposited assets equals 5% of the total value of the pool.Over time, ETH price may change in value compared to USDC. For this example, let’s say the market price of ETH has doubled in value, and is now worth 3,000 USDC.There is now a sizable discrepancy between the market price of ETH and the price of ETH in the liquidity pool.Some traders recognize the arbitrage opportunity and begin adding USDC to the pool to remove the discounted ETH coins. Eventually, the pool rebalances, making the total value of the remaining ETH in the pool equal the same as its value in USDC.However, after arbitrageurs rebalance the pool, it now contains 28.28 ETH and 84,852.81 USDC. The 28.28 ETH at its new price of $3,000 equals $84,852.81, which is the same value as the number of USDC tokens in the pool.Anyone can calculate their potential liquidity mining risk using online impermanent loss calculators.If the liquidity provider decided to withdraw their share of the pool, they would realize a loss of 5.72% compared to if they had simply held their crypto assets and not provided liquidity to the pool.However, they would also earn a portion of the fees that trading within the pool generated. Depending on how much they earned for providing liquidity, these fees may or may not offset the impact caused by impermanent loss.It's important to note that impermanent loss is "impermanent" because it only becomes realized if the user withdraws their liquidity when the prices have moved unfavorably. If the user waits, and the prices revert or balance out, the impermanent loss may decrease or disappear.
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