GOBLIXO
More tokens. less value?
You add two tokens to a liquidity pool. Later, your position has more of one token, yet is worth less than simply holding the original pair. How can both be true?
Start with a simple pool
Use an invented constant product pool. It starts with ten units of token A and one thousand of token B. Ignoring fees, their balance product is ten thousand.
The outside price moves
If A’s outside price rises, arbitrage trades can change the pool’s composition. The pool ends up with less of the appreciating token and more of the other token.
The pool mix changes
Your share follows that changing mix. Counting only the number of units of one token misses the other side. The comparison needs both assets valued at the same final prices.
Compare with holding
The difference against holding the initial assets is commonly called impermanent loss. The name does not promise that it will reverse. Withdrawing can lock in the current result.
Fees are a separate line
Trading fees may offset some difference, but they are a separate component. Concentrated liquidity changes the behavior further, especially near or outside a selected range. Our simple pool is not every pool.
A careful way to use this explanation
For a fee-free illustration, suppose the outside price of A moves from 100 B to 400 B. A balanced pool satisfying x*y=10,000 then has x=5 and y=2,000. Its value is 4,000 B, while holding the original 10 A and 1,000 B gives 5,000 B. The illustrative difference is 20% of the holding baseline. This ignores fees, price impact, incentives and other costs; it is not a forecast.
