The other side of every swap.

You are selling what others want to buy.

Start with the same fee-free constant-product pool: 100 A and 100 B. Suppose one A initially trades for one B. Your deposited assets are worth 200 B in total.

Now the outside price of A rises to four B. Arbitrage buys A from the pool until its marginal quote catches up. With the product still 10,000, the new reserves are 50 A and 200 B.

Those reserves are worth 50 × 4 + 200 = 400 B. Your position increased in value. But simply holding the original 100 A and 100 B would now be worth 500 B.

The pool position is 100 B behind that holding alternative: 20% less. A positive return and underperformance can be true at the same time.

The familiar name can hide the condition.

This gap is commonly called impermanent loss, or divergence loss. It compares the liquidity position with holding the initial tokens. It does not mean the only possible loss is temporary, small, or unrealized.

In this simple model, the gap shrinks if the relative price returns toward its starting point. It disappears at that starting relative price, before fees and costs. The market does not owe you that return.

Withdrawing at a changed price leaves you with the changed inventory. Fees may offset the gap, but they may not. Incentive tokens can add income while introducing their own price and dilution risk.

The example assumes a full-range, equal-value, constant-product position, ordinary tokens, no fees, and arbitrage aligning the pool with an outside market. Concentrated or weighted positions need their own calculations; do not reuse this result as a universal AMM formula.

Count more than the dashboard’s yield.

A provider’s outcome can include swap fees, rewards, inventory changes, network costs, and the cost of changing positions. A displayed annual rate may extrapolate recent conditions that will not continue.

In a concentrated position, leaving the range makes the position inactive and entirely one asset. The absence of new fees does not freeze its market risk. If that asset loses value, the position can still lose value.

Fast traders may trade against a pool before its price catches up to new information elsewhere. Transaction ordering can also affect outcomes. The fee must be understood alongside the cost of supplying inventory to those trades.

Separate from the economics, a token can fail, a peg can break, a contract can be exploited, or an administrator can exercise a permission. Liquidity provision is an active financial risk, even when depositing takes only one click.

The idea to keep

Measure the result against an explicit alternative. “I earned fees” answers one question. “Did those fees compensate me for the inventory and risks?” answers another.