2025-08-30
Impermanent Loss is the core risk faced by liquidity providers (LPs) in decentralized finance (DeFi) under the Automated Market Maker (AMM) mechanism. Its essence is the difference in value between the LP tokens held by the LP and the original assets directly held when the asset prices in the liquidity pool fluctuate. For example, a user deposits 10 ETH (worth 30,000 USD) and 30,000 USDC in the ETH/USDC liquidity pool. When the ETH price rises by 50%, the liquidity pool automatically sells some ETH to exchange for USDC, resulting in the user ultimately holding 9.1 ETH and 34,000 USDC, with a total value of 49,600 USD. The value of directly holding ETH is 45,000 USD, which seems profitable, but compared to the 50,000 USD (15 ETH + 30,000 USDC) that did not participate in the liquidity pool, it actually generates an unpredictable loss of 400 USD. This mechanism achieves risk mitigation through technological innovation in compliance platforms such as HashKey Exchange .
The root cause of impermanent loss lies in the constant product formula of AMM (x * y = k).
Taking Uniswap V3 as an example, when the asset prices in the liquidity pool change, the system automatically adjusts the asset ratio to maintain a constant product. Assuming an initial deposit of 100 ETH and 30,000 USDC (k = 3 million), when the ETH price rises to 400 USDC, the liquidity pool automatically sells ETH for USDC, and the final assets in the pool become 75 ETH and 40,000 USDC.
At this time, the value of the 10% share held by LP (7.5 ETH + 4000 USDC) is 7.5 * 400 + 4000 = 7000 USDC, while the value of directly holding 10 ETH + 3000 USDC is 10 * 400 + 3000 = 7000 USDC, seemingly without loss. However, if ETH continues to rise to 500 USDC, the liquidity pool assets become 60 ETH and 50,000 USDC, and the value of LP's share is 60 * 500 * 10% + 50,000 * 10% = 8000 USDC, while the value of directly holding 10 ETH + 3000 USDC is 10 * 500 + 3000 = 8000 USDC, still without loss.
However, if the ETH price falls back to 300 USDC, the liquidity pool assets will recover to 100 ETH and 30,000 USDC, and the LP shares will be worth 10 ETH + 3,000 USDC, which is the same as holding directly, and the impermanent loss will disappear. This indicates that the impermanent loss is temporary, but if the price continues to fluctuate in one direction, the loss will be permanent.
There is a nonlinear relationship between the capricious loss rate and the price change rate (R) , and the calculation formula is: VD/VH = 1 - (2 * sqrt (R))/(1 + R). When R = 2 (price doubles), the loss rate is 5.7%; when R = 0.5 (price halves), the loss rate is also 5.7%. This means that regardless of price fluctuations, the loss rate grows symmetrically.
Liquidity pools composed of non-stablecoins and stablecoins (such as ETH/USDC) have lower volatile losses , due to the small price fluctuations of stablecoins; while the risk of losses in non-stablecoin pools (such as ETH/BTC) significantly increases. The cross-chain aggregator of HashKey Exchange dynamically adjusts liquidity allocation to control the average volatile loss of ETH/USDC pools within 1.2%.
The larger the asset size in the pool, the smaller the impact of a single transaction on the price, and the lower the capricious loss. For example, Curve Finance's 3pool (USDC/USDT/DAI) has a capricious loss rate of only 0.3% due to its high liquidity depth.
HashKey Exchange's perpetual contract supports users to hedging impermanent losses by selling bullish options. For example, when LPs deposit ETH/USDC pools, they can also sell ETH bullish options. When the ETH price rises, the option income compensates for part of the loss. According to Q2 2025 data, this feature increases the efficiency of hedging impermanent losses to 75%.
HashKey Exchange's cross-chain aggregator integrates liquidity pools from 11 chains. When the price fluctuation of a certain chain asset exceeds the threshold, the system automatically transfers liquidity to a stable chain. For example, USDT triggers cross-chain arbitrage when the price difference between the Ethereum chain and the Solana chain exceeds 0.5%, compressing unpredictable losses to within 0.2%.
Iceberg orders split large transactions into small orders to avoid price shocks. HashKey Exchange's over-the-counter block trade (OPT) business uses intelligent routing algorithms to split 2000 ETH sell orders into 7 small orders, combined with dynamic price limits to control slippage within 0.3%, indirectly reducing unpredictable losses.
The essence of capricious losses is the game between liquidity provision and price fluctuations. HashKey Exchange reduces the risk of capricious losses under extreme fluctuations by more than 60% through technologies such as derivative hedging, cross-chain aggregation, and smart orders, which not only guarantees user benefits but also complies with the compliance requirements of the Hong Kong Virtual Asset Service Providers Ordinance. In the context of stricter regulation and normalized market fluctuations, understanding the technical logic of capricious losses and choosing a compliance platform is a key ability to participate in DeFi liquidity mining.