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LP divergence loss: choose the right comparison
Your pool balance rose, so how can you still have divergence loss?
Compare a simplified liquidity position with holding the original token amounts.
A liquidity provider's asset mix changes as traders swap. When one asset rises relative to the other, a constant-product pool ends with less of the rising asset and more of the other. Arbitrage helps align the pool ratio with outside prices.
Divergence loss, often called impermanent loss, measures underperformance against simply holding the original amounts. It does not necessarily mean the pool is worth less than the initial deposit.
Use an explicit benchmark and the same valuation currency. Our exercise assumes a full-range constant-product position, unchanged ownership share, no fees, and outside arbitrage reaching the final ratio. Concentrated-liquidity positions can behave differently.
Fees and incentives may compensate for some underperformance, but they are not guaranteed to do so. Smart-contract, token and price risks remain separate. The word impermanent does not guarantee recovery; withdrawing can crystallise the difference.
Let’s work through it
- Freeze the original token amounts as the benchmark.
- Revalue both the LP mix and the holding mix at the same prices.
- Compare values before adding fees and other risks.
Let’s use numbers · hypothetical example
Start with 2 X worth 50 Y each plus 100 Y: total 200 Y and k = 200. If X rises to 100 Y, the model ends at about 1.4142 X and 141.4214 Y, worth 282.84 Y. Holding 2 X plus 100 Y would be worth 300 Y. Underperformance is 17.16 Y, or about 5.72% of the 300 benchmark, before fees.
Easy mistakes to watch for
- Calling any growing LP balance free of divergence loss.
- Using the initial deposit as the divergence-loss denominator.
- Assuming the label impermanent promises a rebound.
Keep in mind
The position still gained about 82.84 Y from its start, yet lagged holding. Do not mix these two comparisons.
Your turn
Explain the two denominators: 200 for return on the original deposit and 300 for the holding benchmark. List costs omitted here.
A quick check before we move on
What is the approximate underperformance versus holding?
- 5.72% of 200 Y
- No underperformance because the balance rose
- 5.72% of 300 Y
Check answer
5.72% of 300 Y The difference is about 300 − 282.84 = 17.16 Y; 17.16/300 is about 5.72%.
Sources and further reading
Content reviewed: 29 October 2026
Educational material with hypothetical examples. Trading can cause substantial losses. A course, pattern, stop order or past result cannot guarantee a profit or limit every loss. Practise in simulation and check current rules and product terms in your jurisdiction.