Unrealized P&L

Unrealized P&L is the theoretical profit or loss on an active, open position, based on current market prices. It is calculated as:

• For a long position: (Current Price - Entry Price) * Position Size
• For a short position: (Entry Price - Current Price) * Position Size This value fluctuates with every market tick and is a mark-to-market valuation, representing the immediate liquidation value of the position.

These are the two fundamental states of profit and loss in trading.

• Unrealized P&L: A paper gain/loss on an open position. It is volatile and not yet locked in.
• Realized P&L: The actual profit or loss captured when a position is closed. It is calculated as the difference between the exit price and the entry price. A position's total lifecycle P&L is the sum of all realized gains/losses plus the final unrealized P&L.

Unrealized P&L is a primary dashboard metric for traders and risk engines. It is used to monitor:

• Margin Health: Large negative Unrealized P&L can trigger margin calls or liquidation if it erodes the required collateral.
• Stop-Loss & Take-Profit Triggers: These automated orders are often set based on specific Unrealized P&L thresholds.
• Portfolio VaR (Value at Risk): Contributes to calculating potential losses over a given time horizon.

The distinction between unrealized and realized P&L has significant financial reporting consequences.

• Generally Accepted Accounting Principles (GAAP): May require marking certain portfolios to market, making Unrealized P&L affect earnings.
• Tax Jurisdictions: Most tax authorities (e.g., IRS) tax realized gains only. Unrealized gains are typically not a taxable event until the asset is sold, a key concept in tax-loss harvesting strategies.

In leveraged trading (e.g., perpetual swaps), Unrealized P&L is magnified and directly interacts with funding mechanisms.

• Leverage Effect: A 1% price move creates a much larger percentage move in Unrealized P&L (e.g., 10x leverage = ~10% P&L move).
• Funding Rate Payments: In perpetual contracts, Unrealized P&L can determine the side (longs or shorts) that pays the periodic funding rate to maintain the contract's price peg to the spot market.

Scenario: Buy 1 Bitcoin futures contract at an entry price of $60,000.

• If BTC price rises to $65,000: Unrealized P&L = ($65,000 - $60,000) * 1 = +$5,000. This is a paper profit.
• If BTC price falls to $58,000: Unrealized P&L = ($58,000 - $60,000) * 1 = -$2,000. This is a paper loss.
• Closing at $65,000: The +$5,000 Unrealized P&L becomes Realized P&L. The initial -$2,000 paper loss would have been avoided if closed earlier.

Unrealized P&L is the paper profit or loss on an asset or position that has not yet been closed. It is calculated as:

Unrealized P&L = Current Market Value - Cost Basis

• Realized P&L is only recorded upon closing the position (e.g., selling an asset, closing a loan, exiting a liquidity pool).
• In DeFi, this is often tracked in real-time by protocols and dashboards to inform user decisions.

On lending protocols like Aave or Compound, and perpetual futures DEXs like dYdX or GMX, unrealized P&L is vital for risk management.

• For a leveraged long position, if the collateral asset's price falls, the unrealized loss increases, risking liquidation.
• The protocol continuously compares the position's health (including unrealized P&L) against the liquidation threshold to trigger automatic margin calls.

Liquidity providers (LPs) in Automated Market Makers experience unrealized P&L due to impermanent loss.

• The value of the LP's pool share is compared to the value of holding the initial assets separately.
• This loss is 'impermanent' and unrealized until the LP withdraws liquidity from the pool, at which point it becomes a realized loss (or gain).
• Tools like Uniswap V3 position managers display this metric prominently.

Accurate unrealized P&L calculation is entirely dependent on a reliable oracle price feed.

• Protocols use a mark price (a fair market value from an oracle) rather than the last traded price on their own venue to prevent manipulation.
• A discrepancy between the oracle price and the DEX's internal price can create arbitrage opportunities but is essential for fair liquidation events.

In lending protocols, unrealized losses directly degrade a position's Health Factor.

Health Factor = (Collateral Value * Liquidation Threshold) / Total Borrowed

• A drop in collateral value (increasing unrealized loss) reduces the numerator, lowering the Health Factor.
• If Health Factor ≤ 1, the position becomes eligible for liquidation. Thus, monitoring unrealized P&L is crucial for borrowers.

For regulatory and tax purposes, unrealized gains are typically not taxable events, while realized gains are.

• This distinction is complex in DeFi, where actions like harvesting yield, swapping within a liquidity position, or closing a loan can trigger a realization event.
• Specialized crypto tax software parses blockchain data to differentiate between unrealized and realized P&L across numerous protocols.

The actual profit or loss generated when a position is fully or partially closed. It is the counterpart to unrealized P&L, which only exists on paper. Realized P&L is locked in and can be withdrawn or reinvested.

• Key Difference: Unrealized P&L is theoretical; Realized P&L is actualized cash flow.
• Tax Implication: In many jurisdictions, only realized gains are subject to capital gains tax.

The accounting practice of valuing an asset at its current market price, which is the core mechanism behind calculating unrealized P&L. For on-chain positions, this involves using the latest price from a decentralized oracle or an on-chain DEX.

• Purpose: Provides a real-time, fair value assessment of open positions.
• Risk Management: Enforces margin calls and liquidation in DeFi lending protocols when MTM value falls below required collateral ratios.

The specific price level at which an undercollateralized leveraged position (e.g., in a perpetual futures contract or lending protocol) is automatically closed by the protocol. This event forcibly realizes the user's P&L as a loss.

• Mechanism: Triggered when the mark-to-market value of collateral no longer covers the debt + liquidation fees.
• Example: In a 5x long ETH position, a small price drop can quickly push the position's value toward its liquidation price, crystallizing a total loss.

A periodic payment exchanged between long and short traders in perpetual futures markets to peg the contract price to the underlying asset's spot price. It directly impacts the cost of holding a position and thus affects unrealized P&L over time.

• Positive Rate: Longs pay shorts (encourages selling).
• Negative Rate: Shorts pay longs (encourages buying).
• Net Effect: Acts as a carrying cost or yield, continuously adjusting the break-even point for open positions.

The original value of an asset for tax and accounting purposes, typically including the purchase price and associated transaction fees (gas). It is the reference point against which both unrealized and realized P&L are calculated.

• Formula: Unrealized P&L = (Current Market Price - Cost Basis) * Position Size.
• Importance: Determines the magnitude of potential gain or loss and is crucial for calculating capital gains.

A risk metric representing the sensitivity of a portfolio's total value to changes in the price of the underlying asset. The sum of all unrealized P&L deltas across positions indicates the portfolio's net directional exposure.

• Delta-Neutral: A strategy aiming for a portfolio delta of zero, making the unrealized P&L theoretically insensitive to small price moves.
• Hedging: Used to offset the delta of one position with another, managing overall unrealized risk.

Unrealized losses directly impact the health factor or collateral ratio of leveraged positions. As the loss grows, the position's equity decreases, bringing it closer to the liquidation threshold. This creates a feedback loop where large, unrealized losses across the market can trigger cascading liquidations.

• Example: In a lending protocol, a user's $10,000 ETH collateral position with 70% Loan-to-Value (LTV) may face liquidation if the price drops, causing the unrealized loss to push the LTV above the 80% liquidation threshold.

Capital locked in a position with significant unrealized losses is inefficient. This locked capital cannot be redeployed for other opportunities, representing a substantial opportunity cost. For protocols and DAO treasuries, large unrealized losses on treasury assets can impair their ability to fund operations or grants.

• Key Consideration: Protocols must manage asset concentration risk to avoid having operational runway tied to the volatile P&L of a single asset.

For institutional entities and DAOs, tracking unrealized P&L is essential for GAAP (Generally Accepted Accounting Principles) and on-chain accounting. It affects balance sheet valuations and reported equity. Treasury managers use it to make decisions about hedging, rebalancing, or realizing losses for tax purposes (tax-loss harvesting).

• Operational Impact: Failure to account for unrealized losses can lead to inaccurate financial reporting and poor strategic capital allocation.

Unrealized P&L is vulnerable to oracle manipulation attacks. A malicious actor can temporarily distort the price feed to artificially inflate or deflate the unrealized P&L of large positions, potentially triggering unjust liquidations or enabling exploitative trades. This creates Maximal Extractable Value (MEV) opportunities for searchers and bots.

• Defense: Protocols use time-weighted average prices (TWAPs) and multiple oracle sources to mitigate this risk.

Large unrealized losses can lead to poor decision-making, such as panic selling at a loss or doubling down on a losing position (revenge trading). For protocol governors, the fear of realizing a loss may prevent necessary portfolio rebalancing. Automated strategies may also have behavioral rules (e.g., stop-losses) triggered by unrealized P&L thresholds.

• Risk Management: Distinguishing between paper losses and realized losses is crucial for disciplined trading and governance.

In Automated Market Makers (AMMs), liquidity providers (LPs) face impermanent loss, which is a specific type of unrealized P&L. It represents the loss compared to simply holding the assets, caused by divergence from the deposit price ratio. While unrealized, it impacts LP incentives and overall protocol liquidity depth.

• Implication: High unrealized impermanent loss can lead to LP attrition, reducing liquidity and increasing slippage for all traders on the protocol.