DeFi · 53 / 86 · 3 min
Liquidity pools and impermanent loss
A pool holds two assets so other people can swap. If you deposit both, you earn fees, and you can still end up with less than if you had simply held the coins.
Fees can narrow the gap. They do not erase it. The chart is not a reason to deposit.
Pool value against simply holding both coins. Fees are not included. This is not a reason to deposit.
A worked case
Someone deposits both coins in a pool to earn a fee. One coin doubles. They withdraw and have less value than if they had held both. The fee they earned was smaller than that gap. The page called the fee yield and did not mention the gap.
What a pool is
Traders pay a fee that goes to depositors. Your deposit is what they trade against. You do not control each trade.
The loss with the soft name
If one coin's price runs far from the other, the pool sells the winner and keeps more of the loser. Fees may not cover that. Calling it impermanent does not mean you can always exit whole.
You can also lose the deposit to a bug or a rug. The fee income is not a salary.
The fee was real. The gap was larger.
A liquidity pool pays depositors a share of trading fees. The cost that the posters leave out has a clumsy name, impermanent loss. If one coin's price runs far from the other, the pool sells the winner and holds more of the loser, automatically. You can withdraw less value than if you had simply held both coins. Fees can narrow that gap. In a fast move they often do not close it. The slider on this page is that arithmetic, with fees left out on purpose so you can see the gap alone.
The 2020 and 2021 yield farms wrapped this in a second payment of new tokens, so the fee plus the subsidy looked like a wage. When the subsidy token fell, the gap was still there. People who had deposited both coins to earn a number discovered they had sold their winner the whole way up.
The formula is not on your side. It is the product. If you cannot explain the gap in a sentence, you are being paid in a number you have not defined.
Read it yourself
These links are the record. They are not a recommendation, and they are not instructions. A news story or a court paper can still be wrong about a detail. The check does not change because a famous name is in the story.
Apply the check
Open a question. The line is about this topic. It is not a verdict that anything is safe.
Traders, via fees. You, only if those fees exceed the gap.
The pool's formula, which rebalances without asking you.
The gap, when you withdraw. The pool does not owe you the hold.
Check yourself
Do trading fees mean a liquidity provider cannot lose?
No. Price divergence and a failure of the pool can both cost more than the fees.
After this you can compare holding the two coins with depositing them, before you chase a pool's percentage.