Impermanent Loss Explained: The Hidden Math Behind Automated Market Makers (AMMs)
A mathematical breakdown of impermanent loss in Uniswap v2 and concentrated liquidity pools (Uniswap v3).
Calculate the exact divergence loss of providing liquidity compared to holding, and evaluate fee APY thresholds required to break even.
1. The Constant Product Formula (x * y = k)
Constant product AMMs maintain an invariant pool reserve. When an asset's market price diverges from the ratio when you deposited, arbitrageurs extract value from the pool until prices align.
This divergence causes you to hold more of the declining asset and less of the appreciating asset compared to simply holding both assets in cold storage.
Interactive Tools Related to this Article
Secure your crypto offline with Trezor Safe 5
Full open-source firmware, secure element protection, and intuitive touchscreen control. Never store your seed phrase on a phone or laptop.
Affiliate partner: BlockToolsHub may earn a small referral commission at no additional cost to you.