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Part 1 of the course showed the machinery - the symmetry, the fracture, the shadow.
But understanding impermanent loss isn’t complete until you see what happens when the system meets a real market.
This is where theory stops being safe.
In Part 2, the concepts you learned are stress-tested.
BTC surges. ETH lags. The pool bends. The shadow widens. Fees flow. Value shifts.
And suddenly the question isn’t what impermanent loss is -
it’s what it does to you.
This is the moment when Tao begins to understand why some people profit, why others lose, and why yield exists at all.
And it’s the moment when you’ll see clearly whether liquidity provision is a tool you want - or a structure you’d rather observe from a distance.
If Part 1 opened the door,
Part 2 shows what walks through it.
The Observatory lights dimmed further as the hour slipped past midnight.
Only the screen remained illuminated - two assets, two curves, drifting in quiet disagreement.
Ava pulled another sheet forward, and this time she added two labels beside the shaded diagram:
BTC
ETH
Tao raised an eyebrow.
“Real tokens?” he asked.
“We need something concrete now,” Ava said. “Something you can feel. Let’s use BTC and ETH - a pair the system knows well. Their story will make the shadow sharper.”
She drew two simple starting points - equal value deposits.
“Imagine,” she said, “you enter a BTC/ETH pool when both assets sit at a calm ratio: one BTC worth, say, fifteen ETH. You deposit equal value - half in BTC, half in ETH. The pool accepts your symmetry, locks you into its equation, and opens trading.”
Tao nodded.
“This is the beginning. The moment before anything changes.”
“Exactly,” Ava replied. “Now we follow two paths. The world outside - and the world inside the pool.”
Ava tapped the page.
“Let’s say BTC rallies. Hard. One BTC climbs from fifteen ETH to twenty. The world celebrates - Bitcoin dominance rising, momentum turning, narratives shifting.”
Tao imagined it.
He’d seen it before - charts lighting up across feeds, the slow crush of capital rotating.
“If you stayed outside the pool,” Ava continued, “your BTC simply rides the wave. One BTC becomes worth more ETH. Your ETH stays your ETH. Nothing rearranges itself. You hold what you chose to hold.”
Tao nodded slowly.
“Pure exposure. No reshaping. No symmetry to defend.”
“Correct,” she said. “Outside the pool, your position is yours alone. The market moves; your holdings stay fixed.”
Ava drew the rising BTC line again, but this time she shaped the pool’s response beneath it.
“Now let’s see what happens inside,” she said. “When BTC rises, traders want BTC. They buy it from the pool. And because every buy removes BTC, the pool must compensate - it gives them BTC and absorbs ETH in return.”
Tao felt the shift.
“So the pool loses BTC and gains ETH just as BTC is climbing.”
“Yes,” Ava said softly. “The equation demands it. As BTC becomes more valuable outside, you hold less of it inside. Because the pool is bending - redistributing - to maintain x · y = k.”
She turned the page to reveal a second shaded diagram — the shadow slightly larger now.
“This,” she said, pointing to the gap, “is the value difference between the BTC/ETH you would have held outside and the BTC/ETH the pool forces you to hold inside.”
Tao exhaled.
“So as BTC rises, I end up with more ETH - the weaker asset - and less BTC - the stronger one.”
“Exactly. You still benefit from the rising price,” Ava said, “but less than you would have. You traded pure exposure for liquidity provision. The shadow deepens.”
Ava leaned back slightly, voice steady.
“Yet this is where nuance matters. Many people think impermanent loss means the pool shrinks. But if volume is high - if thousands trade against your liquidity - the pool itself can grow.”
Tao’s eyes sharpened.
“Grow… how?”
“In fees,” Ava said. “Every trade in the BTC/ETH pool pays a toll. With enough volume, the total value of the pool rises. Your share of it rises too. And sometimes - not always, but sometimes - the growth from volume outpaces the shadow caused by divergence.”
Tao sat with that.
“So impermanent loss is only one side of the story. The other side is the pool’s expansion.”
“Yes,” Ava replied. “Liquidity providers earn yield because they shoulder the pool’s symmetry - they absorb its reshaping. Fees compensate for that burden. Think of it not as loss, but as the cost of enabling a smoother market. And sometimes, the market rewards you more for carrying that burden than divergence takes away.”
Tao stared at the BTC/ETH diagrams, now understanding both the fracture and the compensation.
“So if BTC surges, I lose alignment - that’s the shadow. But if enough traders pass through the pool chasing that move, their fees swell the pool’s size. Two worlds pulling in opposite directions.”
Ava nodded.
“And IL is simply the tension between them.”
Tao tapped the table lightly, a quiet rhythm of realization.
“Outside, you hold your tokens.
Inside, the pool holds you.”
Ava’s lips curved into the faintest smile.
“That is the clearest way to say it. And now that you can see both worlds, the next step is understanding how deep the shadow can run — and why it sometimes barely appears at all.”
She turned a final page.
A new heading waited, crisp and deliberate:
“Lesson 6 - When Impermanent Loss Is Small - and When It Hurts”
Ava closed the notebook with care.
“When you’re ready,” she said, “we descend deeper.”