Calculate impermanent loss for AMM liquidity pools
Impermanent Loss (IL) is a phenomenon unique to liquidity providers in Automated Market Makers (AMMs) like Uniswap or PancakeSwap. It occurs when the price ratio of the two deposited tokens changes after you provide liquidity, compared to the ratio when you deposited them. Because the AMM rebalances your holdings to keep the pool value balanced, you end up with more of the asset that has decreased in value and less of the asset that has increased in value.
This "loss" is termed "impermanent" because if the token prices return to their original ratio, the loss vanishes. However, if you withdraw your liquidity while the price divergence exists, the loss becomes permanent. Essentially, by participating in a liquidity pool, you are betting that the trading fees earned over time will outweigh the potential negative impact of this price divergence. Using this calculator helps you quantify that risk by comparing your current LP position against a simple "HODL" strategy.
In volatile markets, IL can significantly erode your returns. Always weigh your expected trading fee income against the price volatility of the pair you are staking.