Calculating Impermanent Loss

Impermanent loss can be calculated using the following formula:

Impermanent Loss = (2 * sqrt(price ratio)) / (1 + price ratio) - 1

Where the price ratio is the change in price of Token B relative to Token A.

Let's consider a simple example:

Suppose you provide liquidity to an ETH/USDC pool in Forge. At the time of deposit, 1 ETH is worth 2000 USDC. Later, the price of ETH increased to 2500 USDC. The price ratio is 2500/2000 = 1.25.

Plugging this into the formula:

Impermanent Loss = (2 * sqrt(1.25)) / (1 + 1.25) - 1 = 0.020 or 2.0%

In this case, the impermanent loss would be 2.0%. If you withdraw your liquidity at this point, this will become a permanent loss.