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Outside the Observatory window, dawn had not yet touched the horizon.
The world was still dark, still silent - a perfect mirror for the concept Ava was about to reveal.
Tao sat upright, sensing a shift.
“Earlier,” he said, “you showed me the shadow - the gap between the world outside and the world inside the pool. But how deep can that shadow run? How far can the divergence stretch before the system truly bites?”
Ava opened the notebook again.
And this time, she didn’t begin with ratios or diagrams.
She began with a story.
“Imagine,” she said, “our BTC/ETH pool again. Calm market. BTC sitting at fifteen ETH. You deposit equal value - symmetry established.”
Tao nodded.
“And then,” Ava continued, “Bitcoin doesn’t just rise. It erupts. A 3× move. One BTC goes from fifteen ETH to forty-five.”
Tao’s eyes widened - he had lived through moves like that, the sudden violence of momentum.
“If you held your BTC outside the pool,” Ava said, “your one BTC simply becomes worth forty-five ETH. Clean. Direct. No interference. Your exposure does exactly what the market does.”
She paused.
“But inside the pool, the story changes.”
“When BTC begins its climb,” Ava said, “traders buy it from the pool at every step. They drain BTC. They flood the pool with ETH. And because the constant product must hold, the pool responds by giving up more and more BTC as its price rises.”
Tao frowned.
“So while the world moves up, the pool moves away from the asset that’s appreciating.”
“Yes,” Ava replied. “By the time BTC has tripled, the pool holds significantly less BTC and significantly more ETH. You still profit - but you do not get 3×. You get something far smaller.”
She sketched a simple outcome in her notebook:
Outside the pool:
1 BTC → worth 45 ETH
Inside the pool:
Your BTC is mostly sold into ETH during the rise → maybe worth 32–35 ETH depending on the path traders took.
Tao exhaled slowly.
“So you gain… but less than you would have.”
“Yes,” Ava said. “This is impermanent loss in its clearest form. Not a loss of money - a loss of alignment. The pool traded for you. It sold strength to maintain balance.”
Tao looked confused.
“So then how can the pool increase in size? If it’s constantly giving up the winning asset, how can the total value rise?”
Ava turned to a fresh page.
“Because the pool does not live on price alone. It lives on volume. Every trade on the way up pays a fee. And if the rally is violent enough, the fees can swell the pool’s total value more than divergence shrinks it.”
She drew a simple comparison:
“The system is not punishing you,” she said.
“It is paying you for carrying the burden of symmetry.”
Tao shifted in his seat.
“And on the downside?” he asked quietly. “What if BTC collapses instead of surging?”
Ava’s expression didn’t change - calm as always.
“Then the shadow deepens in the opposite direction. If Bitcoin falls to one-third its value - say, from fifteen ETH to five - then ETH becomes the stronger asset.”
“And the pool…?”
“The pool will accumulate BTC,” Ava said. “Buyers sell BTC into the pool as the price falls. The pool gains more of the weaker asset. You end up with far more BTC than you want, and less ETH - the asset that held its ground.”
Tao closed his eyes briefly.
“So on the way up, the pool sells my strength.
On the way down, it buys my weakness.”
Ava nodded.
“That is the nature of symmetry. It never chases momentum. It always pulls toward balance. And that is why liquidity provision is not free. It is service. You stabilize the market, and in return, the market compensates you with fees.”
Ava placed the pen down.
“The shadow is deepest when divergence is greatest,” she said.
“A 3× move, up or down, is not gentle. It is structural stress.”
Tao leaned in.
“So IL is really the distance between the two worlds at their point of maximum disagreement.”
“Yes,” Ava replied. “And that disagreement becomes permanent if the market never returns to the entry ratio. Because the pool cannot return you to your original composition - only the market can close the gap.”
Tao looked at the BTC/ETH diagrams - pumps, dumps, swelling pool size, shrinking alignment - and finally understood the architecture behind the noise.
“So liquidity provision,” he said softly, “is not about predicting moves. It’s about accepting how the system behaves when moves happen.”
Ava closed the notebook, the sound gentle but final.
“And now,” she said, “you are ready for the final step - understanding why people still choose to provide liquidity despite the shadow… and when it becomes a tool instead of a trap.”
She revealed the next title:
Lesson 7 - Why People Choose Liquidity - Even Knowing the Cost.
She met his eyes.
“When you’re ready,” she said, “we finish the piece.”