Topic: How does the liquidity pool works? (Read 78 times)

Thank you so much! Finally I understand it:)

Let me tell you with an example
Let's say at the time of adding liquidity 1 Ethereum = 1600USDT

You add 2 Ethereum and 3200USDT to the pool
The pool rule is:  x * y = k (constant)
2 Ethereum * 3200 USDT = 6400
Your asset value = 2 Ethereum * 1600USDT +3200 USDT = 6400USDT

For example, if the Ethereum price is 2000 USDT
Your assets on the pool will be contained in the following proportion:
1.6 Ethereum * 4000USDT = 6400 Your asset value = 1.6 Ethereum * 2000USDT + 4000 USDT = 7200 USDT

You can leave the pool, buy 0.4 Ethereum for 800USDT and revert back to the initial ratio: 2 Ethereum to 3200USDT.
You need to understand that you need to pay for several commissions: confirmation of funds, adding liquidity, withdrawing liquidity and exchanging Ethereum for USDT. Perhaps these costs will not cover the profit from adding liquidity to the pool.

For example, if the Ethereum price is 1200 USDT
Your assets on the pool will be contained in the following proportion:
2.67 Ethereum * 2400 USDT = 6400 Your asset value = 2.67 Ethereum * 1200USDT +2400 USDT = 5600 USDT
You can leave the pool, sell 0.67 Ethereum for 800USDT and return to the initial ratio:  2 Ethereum and 3200USDT.

Risks:
You may lose funds if the smart contract is hacked.
If USDT becomes a scam, then the ratio of your funds on the pool:
for example 0.000064Ethereum * 100000000 USDT = 6400
That is, you will lose all your money.

The same will happen if there is any shitcoin in place of USDT that will quickly lose price.

The best pool:  stablecoin * stablecoin , for example USDC * DAI

Hello,

I read many articles about LP and impermanent loss, but one thing is not clear for me:

Please correct me if I’m wrong - I added 100 Dai - 100 X to the pool. Unfortunately X dumps 30% so now I have 70 dai and 130 X. I believe the price of X will recover, and it will be more than $1.
 Is it a goos move to remove the liquidity and add back again when the price go above $1 for example $1.2. In that case I provide 70 dai and 58 X so I saved 72 X tokens.

- Are the liquidity pools works like this?
- At the end of the day does it matter how much was the price for the assets or only the total value? If I understand these pools well then after providing $1000 the total value of my LP will stay on $1000 but with different token ratio.

Thank you guys for your answers.