is it risky?
As is the case with liquidity providing in a standard liquidity pool, there is only one main risk implied with the use of liquidity pools and that is impermanent loss (IL).
In essence, IL is a temporary loss of funds occurring when providing liquidity and it's often explained as the difference between holding an asset versus providing liquidity in that asset.
In a perfect world with no impermanent loss, the liquidity providers (LPs) would just be collecting money from the entirety of the trading fees.
LPs can of course still be profitable even in case of impermanent loss (IL), as long as [impermanent loss < collected fees] is true.
Explain impermanent loss to me like i'm 5 years old
5 years old but I know what an NFT is...
It's simply the difference between holding your NFTs and SOL versus providing those NFTs and SOL to a liquidity pool: if the price of the NFT increases, the liquidity pool will rebalance itself and there is a chance that holding your NFTs may have yielded better return.
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