Arbswap and Impermanent Loss: How Pair Prices Diverge

Arbswap liquidity providers can track impermanent loss by comparing what their pool position is worth with what the same tokens would be worth if held outside the pool. An automated market maker (AMM) adjusts token balances as traders swap, so a change in the pair’s relative price changes the mix a provider owns. The comparison isolates that price effect; it does not by itself say whether the position made or lost money overall.

What does impermanent loss measure?

Impermanent loss measures the difference between the value of a liquidity position and the value of holding its original tokens. In a typical equal-value, two-token pool, a price move leads the AMM to hold more of the token that has fallen in relative value and less of the one that has risen. That automatic rebalancing is the source of the gap.

For a simplified constant-product pool with equal value in each token at deposit, the loss relative to holding can be estimated from the pair’s relative price change. If that ratio doubles or halves, the pool position is worth less than holding the original amounts, before fees and rewards. The estimate is symmetrical for a doubling and halving because what matters is the change in the ratio, not which token is named first.

The word “impermanent” describes the comparison, not a guarantee of recovery. If the relative price returns to its starting point while the provider remains in the pool, the price-driven gap can close. If the provider withdraws while the ratio remains changed, the difference becomes part of the realized result.

How can I track arbswap impermanent loss?

Start with the deposit: record how many units of each token went into the position and their values at that time. Then record the current relative price of the pair and the position’s current token amounts. Compare the position’s current value with the value of the original token amounts at current prices. For the pool step on Arbitrum, arbswap.cc is a decentralized exchange where users can swap tokens, add liquidity to pools and farm rewards.

Keep the price comparison separate from income and costs. Trading fees and farm rewards can offset the gap, while any costs associated with entering or leaving a position affect the result too. A simple ledger makes the distinction clear:

• At entry: token amounts, their values, and the pair’s relative price.
• At review: current token amounts and the same pair-price ratio.
• Price effect: position value compared with holding the original amounts.
• Net result: price effect combined with fees, rewards and transaction costs.

For a standard equal-weight constant-product pool, the price-only estimate is 2√r ÷ (1 + r) − 1, where r is the pair’s relative price now divided by its relative price at entry. The result is a fraction of the hold value: a negative number means the pool position trails holding before income. This formula is a model for that pool design, not a universal figure for every AMM pool.

What changes when pair prices diverge?

As the ratio moves farther from its entry level, the pool’s token mix shifts further from the original deposit, and the gap against holding generally grows in the equal-weight model. The AMM’s rebalancing can be understood like exchanging part of a two-item basket to keep its market values aligned: the basket ends up with fewer units of the item that gained relative value.

That comparison still leaves out the reason a provider might accept the trade-off. Fees from swaps and any farm rewards are separate sources of return, and they vary with activity and pool terms. A position can therefore show impermanent loss against holding while still having a positive net result; it can also fail to earn enough income to make up the difference.

For a useful check, keep the same start date, token pair and valuation method each time you review the position. Confirm that the pool’s design matches the estimate you use, since different AMM designs can rebalance differently. The key change is the relative price: it alters both the pool’s token mix and the comparison with holding. Watch that ratio alongside fees and rewards to see how the position’s full result develops.