A model of an equal-value, no-fee liquidity pool shows how a provider can end with more dollars than the initial deposit yet trail a strategy that keeps the starting tokens when Ether (ETH) rises.
The pool’s shortfall against that comparison is known as impermanent loss. It measures performance against retaining the original assets at their new prices, rather than against the amount first deposited. So a pool position can appreciate in dollar terms while still leaving its provider behind.
In this example, one ETH at $2,000 and 2,000 USD Coin (USDC) make up a $4,000 starting position. When ETH reaches $4,000, keeping those quantities would put the portfolio at $6,000. The pool model instead shifts the balance to about 0.7071 ETH and 2,828.43 USDC, worth about $5,656.85 at the new price. That is $343.15, or roughly 5.72%, below the hold value.
The pool position has nevertheless gained about $1,656.85 from its starting value. The original holdings would have gained $2,000, leaving the provider with the relative shortfall.
The calculation assumes a 50/50 constant-product pool and excludes fees, rewards and other costs. As trades change the pool’s inventory, a rise in ETH relative to USDC leaves the position with less ETH and more USDC. The result describes this particular setup; it does not account for every automated market maker design or establish the net return on a real position.
Uniswap v3 and v4 let providers select a price interval for their liquidity. If the market moves beyond that interval, the position becomes inactive, holds one token and earns no new swap fees. A return to the chosen interval would make the position active again. Fee income and management costs affect a provider’s overall result, so the fee-free comparison alone does not capture it.
