What Is the Impact of Asset Correlation on the Magnitude of Impermanent Loss in a Multi-Asset Liquidity Pool?

Asset correlation is a key driver of impermanent loss. If assets in a pool are highly positively correlated (their prices move together), the risk of impermanent loss is significantly reduced because their relative price ratios remain stable.

Conversely, if assets are uncorrelated or negatively correlated, their prices are more likely to diverge, leading to higher impermanent loss. This is why liquidity pools pairing similar assets, like different types of wrapped Bitcoin, experience very low IL.