Impermanent loss in a liquidity pool: 5.72 percent missing when the price doubles, what investors need to know

Impermanent loss is the gap between two portfolios: the one that would simply have held your coins, and the one that put them into a liquidity pool. If the price of one half of the pool doubles while the other stands still, that gap comes to 5.72 percent. €150 from holding turns into €141.42 in the pool. The effect is no more than that, and it hangs on a single quantity: the ratio of the two prices to each other. Providing liquidity earns you a share of the pool's trading fees. Whether it pays off turns on one question: whether those fees close the gap. This piece works both sides against each other, with figures you can check yourself. What impermanent loss in a liquidity pool really is Liquidity pool: a pot of two tokens that anyone can swap against without needing a counterparty. Instead of an order book with buyers and sellers, a formula sets the price. Anyone who deposits tokens becomes a liquidity provider and no longer holds two coins, but a share of the pot. Impermanent loss: the difference between the value of that share and the value of the coins had you not deposited them. The gap arises from price moves alone, not from fees, not from a hack and not from a flaw in the pr...