Overview

When you provide liquidity, traders are swapping both of your assets back and forth through a liquidity pool. When this happens, the price changes, and it changes the allocation of your assets within the pool. Basically this means you will have more of one asset and less of the other.

• Frequently you hear this called impermanent loss, but it is more accurately called divergent loss.
• Divergent loss happens when the relative price between your deposited assets in a liquidity pool changes compared to when first deposited. This is the nature of LP and is guaranteed to happen.
• The bigger the change, the more you will experience divergence loss. BUT this does not necessarily mean your LP position has lost value.
• Assets that remain relatively stable with small price fluctuations are less subject to divergence loss. Such as USDC / USDh which typically stay in a tight price range.
• Stablecoin pools are significantly less risky when it comes to divergence loss.
• The goal of successful LPing is to generate sufficient fees to overcome losses. If you are able to close your position and end up with more of both tokens than you started with, then you've achieved the goal

Here is a simple breakdown of what it looks like:

• We opened a position in a pool at a specific price point.
• Swaps came through the pool, causing the price of the token to go down. We are now in divergent, or impermanent loss.
• If you withdraw your liquidity at this point you will make your impermanent loss, permanent