On impermanent loss in Uniswap v3 LPs - am I thinking about this right?

asked by u/jelena86 · 2d · 4 answers

I've been trying to wrap my head around impermanent loss in Uniswap v3 concentrated liquidity pools. If I provide liquidity within a tight range and the price moves significantly outside it, effectively I'm holding 100% of the less valuable asset, correct? And then when it returns to my range, I'm hoping to benefit from the fees earned while the price was within the range, but I've still incurred the 'loss' from the asset price moving away and then back, just offset by fees? Is there a good way to model this out to understand the true break-even point considering gas and opportunity cost?

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Top answers

  • u/sofia_t· 5 pts· 2d

    Yes, that's essentially correct. You're left holding the asset that depreciated in value. The fees you earn have to be enough to offset that loss, which is often not the case if the price swings widely and stays out of range for long.

  • u/irinajovanovic· 3 pts· 2d

    That's exactly right on the 100% less valuable asset point once price moves out of range. The key is whether those fees earned while in range can offset that potential loss. Have you looked into how often prices actually re-enter your initial tight range, or do they tend to just keep trending?

  • u/kavya_k· 0 pts· 2d

    That's how I understand it too. So, the key is really about how often the price returns to your range, and whether the fees earned during those periods outweigh the impermanent loss when it moves outside? It feels like a tough balance to strike.

  • u/pbernard· 0 pts· 2d

    That's largely correct. You'd be holding 100% of the less valuable asset outside your range. The question then becomes whether the fees earned during the in-range period sufficiently offset the opportunity cost of holding that asset versus simply holding it yourself.

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