Detailed Instructions

Begin by recording the exact state of the Automated Market Maker (AMM) pool at the time of your deposit. This requires capturing the pool's reserve ratio and the current market price of the paired assets (e.g., ETH/USDC).

• Sub-step 1: Identify Pool Parameters: Note the pool's contract address (e.g., Uniswap V3 USDC/ETH 0.3% fee pool at 0x8ad599c3A0ff1De082011EFDDc58f1908eb6e6D8). Record the total reserves of each token in the pool.
• Sub-step 2: Record Your Deposit: Precisely log the value and ratio of the two assets you deposited. For example, depositing 1 ETH and 2000 USDC when 1 ETH = $2000.
• Sub-step 3: Calculate Your Pool Share: Determine your share of the pool, often represented by LP (Liquidity Provider) tokens. If you deposited 1% of the total pool value, you own 1% of the LP tokens.

Tip: Use blockchain explorers like Etherscan to query the pool contract's getReserves function at the block height of your transaction to get precise initial data.

Detailed Instructions

Simulate a price change for one of the assets. Impermanent loss quantifies the difference between the value of your LP position and the value if you had just held the assets. Assume the price of ETH changes from $2000 to $4000.

• Sub-step 1: Value if Held (HODL Strategy): Calculate the value of your initial deposit (1 ETH, 2000 USDC) at the new price. New Value = (1 ETH * $4000) + 2000 USDC = $6000.
• Sub-step 2: Value in Pool (Constant Product Formula): The AMM rebalances reserves. Using the constant product formula x * y = k, calculate the new pool reserves and your share's value. If k was initially 2000, new reserves are ~1414.21 USDC and ~1.4142 ETH. Your 1% share is now worth ~0.014142 ETH and ~14.142 USDC, totaling ~$70.71 at the new price.
• Sub-step 3: Execute Comparison: The HODL value is $6000. The LP value is ~$70.71. The difference is the impermanent loss.

Tip: Use an online IL calculator or the formula: IL = (2 * sqrt(price_ratio) / (1 + price_ratio)) - 1, where price_ratio = new_price / old_price.

Detailed Instructions

Translate the difference from the previous step into a clear percentage and dollar amount. Impermanent loss is not realized until you withdraw, but it represents an opportunity cost.

• Sub-step 1: Apply the Impermanent Loss Formula: Use the standard formula: IL (%) = [2 * sqrt(P) / (1 + P)] - 1, where P is the price ratio (new/old). For our ETH price doubling (P=2), IL (%) = [2 * sqrt(2) / (1+2)] - 1 ≈ [2.828 / 3] - 1 ≈ -0.0572 or -5.72%.
• Sub-step 2: Calculate Absolute Value Loss: Apply the percentage to the HODL value. Absolute IL = $6000 * (-0.0572) ≈ -$343.20. Your LP position is worth $343.20 less than your HODL portfolio.
• Sub-step 3: Factor in Earned Fees: Remember, this loss is offset by trading fees earned. Query the pool contract or dashboard to find your accrued fees, which add to your LP position value.

Tip: For quick estimates, remember IL is 0% at P=1, ~2.5% for a 50% price change (P=1.5 or 0.67), and ~5.7% for a 100% change (P=2 or 0.5).

Detailed Instructions

The final assessment requires combining impermanent loss with the fee revenue earned. Your net P&L determines if providing liquidity was better than holding.

• Sub-step 1: Query Accrued Fees: Use the pool's smart contract to check fees attributed to your position. For example, call the positions function on a Uniswap V3 NFT contract with your tokenId to return tokensOwed0 and tokensOwed1.
• Sub-step 2: Calculate Total LP Position Value: Sum the current value of your pool share (from Step 2) and the value of your unclaimed fees. Total LP Value = (Value of Pool Share) + (Fees in ETH * Price) + (Fees in USDC).
• Sub-step 3: Perform Net Profit/Loss Analysis: Compare the Total LP Value to the initial HODL value adjusted for the new price. Net Result = Total LP Value - HODL Value. A positive result means fees exceeded IL.
• Sub-step 4: Model Different Scenarios: Script this analysis to model performance across various price and trading volume assumptions using tools like Python.

pythonCopy
# Example Python snippet for net P&L
initial_hodl_value = 6000
lp_share_value = 70.71
fee_value = 100  # Example fee earnings in USD
net_pl = (lp_share_value + fee_value) - initial_hodl_value
print(f"Net P&L: ${net_pl:.2f}")

Tip: In low-volatility, high-volume pools, fees can easily offset moderate impermanent loss, making LPing profitable.