What is "Volatile Loss" when using DEX?
Let's look at this topic using STON.fi as an example, since many of you use this DEX in the TON blockchain and many often have questions.
Basically, liquidity providers on STON.fi DEX encounter such "Volatile Losses".
And this occurs when you put funds in a liquidity pool, but the price ratio of these tokens has changed significantly - that's why they are called volatile losses.
For example, if you put TON token and STON token (1 TON and 100 STON) into the liquidity pool, which is equivalent to, say, 100 USDT for each token, the TON/STON pool now contains 10 TON and 1000 STON for a total of 200 USDT - these funds were provided by other liquidity providers along with you.
Your share in the liquidity pool is, for example, 10%, and the total liquidity of the pool is considered to be the multiplication of the number of the first and second tokens, and we can denote this amount as 10,000.
At the time of depositing funds into the liquidity pool, their price is 1 TON = 100 STON, and after some time, the price of the TON token increases, and now 1 TON = 400 STON, but the cost of the STON token in USDT does not change.
As a rule, arbitrage traders will add STON to the pool and remove TON from it until the ratio reflects the current price, since while the liquidity of the pool remains stable, the ratio of assets in it changes.
Now we can assume that due to the actions of arbitrage traders, the ratio of tokens in the pool became equal to 5 TON = 2000 STON.
You decide to withdraw your funds and if your share in the liquidity pool is 10%, then you will receive 0.5 TON and 200 STON, but with the new token price of 1 TON = 400 STON = 400 USDT, you withdraw tokens in the amount of 0.5 * 400 + 200 * 1 = 400 USDT, your asset has doubled!
But if, for example, you decided to hold tokens and not provide a liquidity pool, due to a jump in the price of the TON token, your 200 USDT would turn into 1 * 400 + 100 * 1 = 500, and the difference of 100 USDT is called impermanent losses.
You can calculate it yourself like this:
Price change by 1.25x — loss 0.6%
Price change by 1.5x — loss 2%
Price change by 1.75x — loss 3.8%
Price change by 2x — loss 5.7%
Price change by 3x — loss 13.4%
Price change by 4x — loss 20%
Price change by 5x — loss 25.5%
Fortunately, if the intermittent loss calculator, which you can use at this link.
Have a good trading and less intermittent losses.
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