How Does the Concept of “Opportunity Cost” Relate to Impermanent Loss?

Opportunity cost is the value of the next best alternative forgone. In the context of impermanent loss, the opportunity cost is the profit that would have been made if the liquidity provider had simply held the initial assets (HODL) instead of depositing them into the pool.

Impermanent loss is essentially the realization of this opportunity cost when the price ratio diverges.