Market structure
Divergence loss: what a liquidity position gives up relative to holding
Fee income and inventory changes must be evaluated together.
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The comparison needs a benchmark
A liquidity provider can finish with more dollars than they started with and still underperform simply holding the deposited assets. Arbitrage changes the pool inventory as the relative market price moves, so the provider owns a different mix at withdrawal.
For an idealised equal-value constant-product position without fees, the relative value against holding is 2 times the square root of r, divided by 1 plus r, where r is the price ratio after the move. If r is 4, the ratio is 0.8: a 20% shortfall against the holding benchmark. This is not automatically a 20% loss against the original dollar deposit.
The name can obscure the exposure
The conventional term impermanent loss can make the risk sound temporary or harmless. A return to the original relative price can reverse the simplified divergence, but there is no promise that this will happen. Withdrawal realises the inventory then available.
Fees, incentives, gas and any concentrated-liquidity range change the complete result. Compare the pool equation with cash-flow reconciliation rather than quoting an annualised fee rate as the whole investment return.