What is the difference between price effect and impermanent loss?
Price effect refers to the net equity value change due to changes in asset prices in the liquidity pool, compared to your principal. It might be positive or negative, depending on token price fluctuations and trading fee rewards in the pool.
Impermanent loss refers to the "loss" when you deposited your assets to a liquidity pool to get a share in the pool (LP-tokens) followed by tokens' price change, compared with simply holding the assets on hand. It is the result of fluctuations in the underlying value of the assets being swapped, and happens whenever the relative price of the tokens changed. It is always negative.
Please note that price effect is focusing on ACTUAL price change while impermanent loss is focusing on RELATIVE price change. Thus, it’s possible to achieve 0 impermanent loss but high price effect for the liquidity provision.
Here are two examples for illustration, but please note that the values here do NOT account for trading fee rewards for simplicity's sake.
Case 1: Farming in a non-stablecoin-stablecoin Liquidity Pool (LP) in 50:50
Consider the liquidity pool CRO-USDC LP, with USD2,000 principal
Assume CRO/USDC = 0.5 on day 1
Case 2: Farming in a non-stablecoin-non-stablecoin pair Liquidity Pool (LP) in 50:50
Consider the liquidity pool CRO-SINGLE LP, with USD2,000 principal
Assume CRO/USDC = 0.5 and SINGLE/USDC = 0.25 on day 1