DeFi liquidity mining may seem simple, but there are many nuances. Recently, many beginners have asked: I clearly provided liquidity, my tokens didn't lose value, so why did my funds still decrease? This question is very insightful, so let's use a very relatable example to clarify.

Imagine you and a friend open a small shop together, selling apples and bananas. You both contribute 100 apples (worth 100 yuan) and 100 cash (enough to buy 100 bananas), for a total of 200 yuan in assets. The shop has an unwritten rule — the number of apples must be equal to the number of bananas.

Suddenly, one day, the supply of apples becomes scarce, and the price skyrockets to 2 yuan each. Customers flock in to buy apples, the shop's apples become fewer and fewer, while bananas pile up. When the system automatically balances, problems occur: to maintain the balance, you have to keep exchanging apples for bananas.

When closing the shop and settling accounts, the total book value is only about 282 yuan. But if you hadn't participated in liquidity provision and just held onto 100 apples and 100 yuan cash, it would now be worth 300 yuan (100 apples × 2 yuan each + 100 yuan cash).

Comparing the two, you find you've lost nearly 20 yuan — this is what is called impermanent loss. The more volatile the price fluctuations, the bigger this "trap" becomes. That's also why some people end up losing money instead of earning after providing liquidity.