Impermanent Loss: Pooling Versus Holding Two Tokens
Impermanent loss is the gap between what your pool share is worth and what the same tokens would be worth if you had held them. It matters when the two tokens change price by different amounts.
On a centralised exchange, you choose what to hold. In a liquidity pool, traders swap against tokens supplied by users, and the pool’s balance shifts as prices move. Byreal is one Solana venue where people can provide liquidity; the same comparison applies across many pools.
Different price moves change your token mix
In a classic pool that keeps the product of its two token balances constant, arbitrage traders act when the pool price falls behind other markets. They buy the underpriced token from the pool, so your share gradually holds less of it and more of the other token.
Consider an example starting with one token worth $100 and 100 units of a stablecoin worth $1 each. You put in $200 total. These figures illustrate the mechanism; they are not a forecast.
Case A: the token doubles. Holding would leave you with $300: one token worth $200, plus $100 in stablecoins. In the pool, your share would be about 0.707 token and 141.4 stablecoins, worth about $282.84. That is roughly 5.7% less than holding, before trading fees and other costs.
Case B: both prices move together. If the token and stablecoin both doubled in dollar value, their relative price would stay the same. The pool would not need to rebalance between them, so this source of loss would be absent. ESMA describes the rebalancing effect as arbitrageurs trading against a pool when its price lags the market.
Compare the pool with the tokens you would hold
“Impermanent” describes the comparison, not a promise that a loss will reverse. If the relative price returns to its starting point, a classic pool’s mix can return too; if you withdraw while prices differ, the gap is realised. Other pool designs, such as concentrated liquidity, can behave differently.
Before adding liquidity through Byreal or another Solana venue, write down your alternative: the two amounts you would keep in your wallet. Compare their value with your estimated pool share, then account for trading fees earned, transaction fees, and any costs to enter or exit. Solana’s documentation says transaction fees are paid in SOL; fees and required transactions can vary.
Questions to ask before adding liquidity
Does impermanent loss mean I lost money overall?
No. It means your pool position underperformed holding the same tokens over the same period. The pool could still be worth more than when you entered, especially if both tokens rose. The comparison matters because the better outcome may have been to keep the tokens in your wallet.
Can trading fees make up the difference?
Yes, but there is no guarantee. Fees must exceed the pool’s shortfall against holding, plus transaction and exit costs, for the pool to outperform that alternative. Fee income changes with trading activity, your share of the pool, and the pool’s rules.
What should I ask myself before acting?
Ask: “Would I be comfortable holding the changing mix of these two tokens if their relative prices moved sharply?” If not, liquidity provision may not suit your plan. If yes, decide in advance how you will compare your position with holding and when you will review it.