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I was tinkering with this impermanent loss calculator and noticed that if the price of an asset drops while you are using it to provide liquidity, that seems to buffer you against losses because you lose less than you would have if you had just held.

For example, if we use the calculator and simulate depositing $1000 into a ETH/DAI pool (50% weight each) and the price of ETH drops, say 50%, you are left with ~$707.1. This is sure better than the $500 you'd have if you just held.

Is this correct, or is there something I'm missing? And how exactly does this work?

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You'd have $750 if you held. Because you'd start with $500 ETH and $500 DAI and end with $250 ETH and $500 DAI.

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  • Oh that’s right. Welp I feel stupid, hope someone takes this question down.
    – Brian Le
    Commented Dec 1, 2021 at 5:10

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