Understanding Liquidity and Liquidity pools

  • The body — limits of the liquidity pool
  • The rods — liquidity providers
  • The beads — liquidity
Liquidity Pools — Open Finance

The LPs and liquidity mechanics

Visualization of a trade on an AMM

A short example

A more in-depth view of price impact and slippage

The dangers of Impermanent Loss

Possible evolution of the two token prices in this scenario
  • 1.25x price change = 0.6% loss
  • 1.50x price change = 2.0% loss
  • 1.75x price change = 3.8% loss
  • 2x price change = 5.7% loss
  • 3x price change = 13.4% loss
  • 4x price change = 20.0% loss
  • 5x price change = 25.5% loss
  1. The good one, where token prices fluctuate around the same price or increase/decrease at the same rate.
The situations favorable to LPs
The situations unfavorable to LPs

Conclusion

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