nirholas

impermanent-loss-calculator

Calculate and explain impermanent loss for AMM liquidity positions, providing scenario analysis across price movements and comparison against simple holding strategies.

nirholas 247 69 Updated 5mo ago
GitHub

Install

npx skillscat add nirholas/three-ws/impermanent-loss-calculator

Install via the SkillsCat registry.

SKILL.md

Impermanent Loss Calculator

When to use this skill

Use when the user asks about:

  • Calculating impermanent loss for a liquidity position
  • Understanding how IL works mechanically
  • Comparing LP returns vs holding
  • Estimating IL for various price scenarios
  • Deciding whether to provide liquidity based on IL risk

Explanation Framework

1. Gather Position Details

Collect from the user:

  • Token pair: The two assets in the pool (e.g., ETH/USDC)
  • Entry prices: Price of each token when liquidity was provided
  • Current prices: Price of each token now (or target scenario prices)
  • Pool type: Constant product (50/50), concentrated liquidity, or weighted
  • Position value: Total USD value deposited

2. Impermanent Loss Formula

For a standard constant product AMM (50/50 pool):

IL = 2 * sqrt(r) / (1 + r) - 1

Where r = (new price / entry price) of one token relative to the other.

Present IL as both:

  • A percentage loss relative to holding
  • An absolute dollar amount based on position size

3. Scenario Table

Generate a table showing IL at various price divergence levels:

Price Change Price Ratio (r) IL % IL on $10K Position
0% 1.00 0.00% $0
+/- 10% 1.10 or 0.91 -0.11% -$11
+/- 25% 1.25 or 0.80 -0.60% -$60
+/- 50% 1.50 or 0.67 -2.02% -$202
+/- 75% 1.75 or 0.57 -3.77% -$377
+/- 100% 2.00 or 0.50 -5.72% -$572
+/- 200% 3.00 or 0.33 -13.40% -$1,340
+/- 400% 5.00 or 0.20 -25.46% -$2,546

Customize the table with the user's actual position size.

4. Break-Even Analysis

Calculate how much fee income is needed to offset IL:

  • Required daily fee income = IL amount / days in position
  • Compare against actual or estimated pool fee APR
  • Determine the break-even time horizon
  • State clearly whether the current fee rate covers the IL

5. Concentrated Liquidity Adjustments

For concentrated liquidity positions (Uniswap V3, etc.):

  • IL is amplified inversely proportional to the range width
  • A position concentrated in a ±10% range has roughly 10x the IL of a full-range position at the same price move
  • If price exits the range, the position becomes 100% one token (maximum IL for that range)
  • Factor in capital efficiency gains — narrower ranges earn proportionally more fees

6. Holding vs LP Comparison

Present a side-by-side comparison:

Strategy Value if held Value as LP Difference
At entry $X $X $0
At current prices $Y $Z IL amount

7. Output Format

Summarize with:

  • Impermanent loss: X% ($Y)
  • Fees earned estimate: $Z
  • Net P&L vs holding: Positive or negative
  • Recommendation: Whether fees are likely to outpace IL
  • Risk note: Remind user that IL becomes permanent loss upon withdrawal if prices have diverged

Categories