Liquidity Providers in Automated Market Makers (AMM) lose billions of dollars each year to Impermanent Loss (IL). But Impermanent Loss is pernicious: it is not directly displayed on AMMs. In this article, we’ll tell you how to use an Impermanent Loss Calculator so that you can make the best investment decisions.
First of all, let’s consider the lack of information about IL. When you invest in a stock, you have a clear view of the money initially invested, and unrealized gains/losses since you bought the stock. Imagine you buy a Tesla stock for $100 and it goes up 50%. You then have $150 on paper. Your investing app displays a $50 gain. But imagine that when you withdraw the stock, you only get $80 because another financial phenomenon, not displayed in the app, causes the value of your investment to actually drop. You wouldn’t be happy. You would even feel betrayed. Well, the Tesla stock in this fictitious example is the stake in a pool, and the investing app is the AMM. The AMM only calculates your investment’s performance based on the price of the crypto assets it’s made of but ignores IL. That’s how many investors get rekt without even knowing it.
In order to avoid that, we built a novel AMM backed by years of scientific research. It features proven resistance to Impermanent Loss, as well as low trading fees. It’s called Swaap Finance, you should check it out.
When a company is unable to provide a service to you, your only option is to do it yourself. That’s why many people use an impermanent loss calculator. There are two types of calculators available:
- Wallet-based impermanent loss calculator: it computes your total IL based on the on-chain data associated with your wallet. It’s the quickest and easiest way to comprehensively view the value you lost to IL across your investment. An example of this kind of calculator is IL.wtf. It only works with a limited number of DApps: Uniswap, Balancer, SushiSwap, 1Inch, and Kyber network. If you’re using other DApps, they won’t be taken into account.
- Manual impermanent loss calculator: it computes IL on a specific investment when you input the prices of assets in a particular pool when you entered it and when you exited it. An example is the IL calculator by Daily DeFi. It’s more time-consuming, but it allows one to compute IL on any investment.
That’s a wrap! I hope this article was helpful. If you have any questions related to Impermanent Loss, don’t hesitate to reach out to us on Twitter or Discord.