GRIFF COIN

The pool constantly rebalances through trading

When the external relative price of the two assets changes, arbitrage trading changes the pool reserves until its price is brought back toward the wider market.

That changes what the LP owns

Because a liquidity provider owns a share of those changing reserves, the position can end up holding more of the asset that fell relatively and less of the asset that rose relatively.

The comparison is against simply holding

Impermanent loss describes the shortfall, before considering fees and other effects, between the value of the LP position and the value the same starting assets would have had if simply held outside the pool.

“Impermanent” does not mean harmless

If the relative price returns, the divergence can shrink. But if liquidity is withdrawn while the divergence exists, the economic difference is realised. Fees may offset some or all of it, but they are not guaranteed to do so.

The useful takeaway

A no-maths way to picture it

Imagine you deposit equal values of Asset A and Asset B into a pool. Later Asset A rises strongly relative to B. Traders buy A from the pool and add B until the pool price catches up with the wider market. Your LP position ends up with less of the asset that rose and more of the asset that did not. You may still be in profit overall, but you can have less value than if you had simply held the original assets outside the pool. That difference is the core idea behind impermanent loss.

Why “impermanent” can be a misleading comfort

The word can make it sound as though the loss will automatically disappear. It might narrow if relative prices return, but there is no promise they will. If you withdraw while the difference exists, the economic difference is realised. Fees can offset some or all of it in some circumstances, but they can also fail to. For me the useful lesson is that LP returns cannot be judged from fees alone; the changing asset mix matters too.