In this dashboard, we will be looking into the

Calculation the Impermanent Loss while participating in the WETH-SOL Pool versus Just Holding the ETH/SOL

What is Impermanent Loss?

One of the risks associated with liquidity pools is impermanent loss. This occurs when the price ratio of pooled assets fluctuates. An LP will automatically incur losses when the price ratio of the pooled asset deviates from the price at which he deposited funds. The higher the shift in price, the higher the loss incurred. Impermanent losses commonly affect pools that contain volatile digital assets.

However, this loss is impermanent because there is a probability that the price ratio will revert. The loss only becomes permanent when the LP withdraws the said funds before the price ratio reverts. Also, note that the potential earnings from transaction fees and LP token staking can sometimes cover such losses.

Calculation of Impermanent Loss:

Most AMM and liquidity pool uses the below constant product formula that mathematically determines what the market price of the token in the pool should be.

x * y = k

In our scenario x = VELO liquidity pool, y = Token liquidity pool and k = constant product

We can rearrange the equation of the formula to better understand the impact on LP.

VELO price = y / x

x (VELO liquidity pool) = sqrt(k / VELO price)

y (Token liquidity pool) = sqrt(k * VELO price)

In short, Impermanent Loss refers to the situation where you could have made more should you have done nothing and HODL rather than providing LP. The impermanent loss is calculated as the difference between the value of tokens when not in the pool and the one in the pool as a liquidity provider at T2.

With the same logic above, we could derive the formula for the size of the impermanent loss in terms of the price ratio between when liquidity was supplied and now. If you are interested in the derivation process, you could look into the below article

.

Where LR is the Impermanent Loss Ratio,  p1 and p2 are the price at the Time of T1, T2 respectively.

Now let’s go through the process of Calculation of Impermanent Loss:

Initially for the WETH-SOL Pool (0x127452f3f9cdc0389b0bf59ce6131aa3bd763598), compare the price of ETH with the SOL in the POOL.

Now, let’s get The Number of ETH for 1 SOL in the WETH-SOL Pool

SOL price / ETH price

Now, let’s get The Number of SOL for 1 ETH in the WETH-SOL Pool

ETH price / SOL price

The final step is to Calculate the Impermanent Loss Ratio for both ETH Token and SOL Token if its Held rather than LPed into the Pools. For this, we use the LR(Impermanent) Formula that is shown above in the section Calculation of Impermanent Loss.

The below Line Charts and Area Charts shows us the

• Impermanent Loss Ratio of ETH Token comparing with the Two Token Prices in the ETH-SOL Pool by Day-Wise

• Impermanent Loss Percentage while participating in the selected POOL vs Holding the ETH Token.

• Impermanent Loss Ratio of SOL Token comparing with the Two Token Prices in the ETH-SOL Pool by Day-Wise

• Impermanent Loss Percentage while participating in the selected POOL vs Holding the SOL Token.

Next, we can look into the Total USD Amount LPing through the ETH & SOL Tokens into the POOL

From the below graph, we can see the fluctuations of the Total Liquidity Volume (in USD) of ETH Token and SOL Token Provided into the POOL.