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[Symmetrick]

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[percy_tc]

superb explanation, thanks.

[Tytanowy Janusz]

So when proportions in the network are changing (f.e. due to price change on CEX and arbitrage traders or large orders directly on swaps) algo is changing price to compensate this. So if I get this correct fallowing scenario is possible on high volatile coins:

investment
1 ETH and 400 USDT (1 ETH is worth 400$ - total 800$)

ETH pumps x4 in short term ( lets say 4 weeks)

Balance:

0.25 ETH and 400 USDT (1 ETH is worth 1600$ - total 800$ + small profit from fees)

So if I evaluate my wallet in USD (i'm looking for USD gains) than i'm fine (but without LP i would have massive gains intead of few $ from fees) but if I'm a ETH hodler than i'm down 0.75 ETH that i wouldn't be if i just hodl my coins in wallet without engaging in liquidity pool.

Talking about dump instead of pump we get opposite situation.

This leads to the conclusion that liquidity provider is very exposed to price changes and is not as safe as it is presented to masses. Only low volatile pairs like USDT/DAI are safe, but you are exposed to USDT exit scam with whole your wallet (DAI will be dumped to USDT that will become worthless). So if any of 2 stable coins that you have will 0 whole your wallet will zero. That is extra risk that might not be worth taking for 10% annually that in most cases is the actual ROI.

[Princejebs]

Flawless explanation you gave here I must say but providing liquity is subjective to the swap, for example, Uniswap liquidity with the formula x*y=k differs on other swap decentralized exchanges.
Liquidity comes with a risk and best as an option for large investors on large pools with high trading volume.

[niksdt101]

Thanks for the article op. really well and detailed explanation which is much needed in these time where all the projects are hyping lending and liquidity pools

[Francis Freeman]

So when proportions in the network are changing (f.e. due to price change on CEX and arbitrage traders or large orders directly on swaps) algo is changing price to compensate this. So if I get this correct fallowing scenario is possible on high volatile coins:

investment
1 ETH and 400 USDT (1 ETH is worth 400$ - total 800$)

ETH pumps x4 in short term ( lets say 4 weeks)

Balance:

0.25 ETH and 400 USDT (1 ETH is worth 1600$ - total 800$ + small profit from fees)

So if I evaluate my wallet in USD (i'm looking for USD gains) than i'm fine (but without LP i would have massive gains intead of few $ from fees) but if I'm a ETH hodler than i'm down 0.75 ETH that i wouldn't be if i just hodl my coins in wallet without engaging in liquidity pool.

Talking about dump instead of pump we get opposite situation.

This leads to the conclusion that liquidity provider is very exposed to price changes and is not as safe as it is presented to masses. Only low volatile pairs like USDT/DAI are safe, but you are exposed to USDT exit scam with whole your wallet (DAI will be dumped to USDT that will become worthless). So if any of 2 stable coins that you have will 0 whole your wallet will zero. That is extra risk that might not be worth taking for 10% annually that in most cases is the actual ROI.

 Thank you for explaining this and the op for putting a explanation about Liquidity pools. I swhat you explained called impermenant loss in LP's?
 Is there any possibility that we lose value in USDT?

[Tytanowy Janusz]

Thank you for explaining this and the op for putting a explanation about Liquidity pools. I swhat you explained called impermenant loss in LP's?
 Is there any possibility that we lose value in USDT?

After short read it looks like impermanent loss is something that I've explained above without knowledge that it is it and has a separate name in the liquiditypools nomenclature:).

https://blog.bancor.network/beginners-guide-to-getting-rekt-by-impermanent-loss-7c9510cb2f22

"What Is Impermanent loss?
Simply put, impermanent loss is the difference between holding tokens in an AMM and holding them in your wallet.
It occurs when the price of tokens inside an AMM diverge in any direction. The more divergence, the greater the impermanent loss.
Why “impermanent”?
Because as long as the relative prices of tokens in the AMM return to their original state when you entered the AMM, the loss disappears and you earn 100% of the trading fees."

So risk from providing liquidity in case of high volatility. Price dump without recover.

[Kunnu]

Very informative article to understand about the pool of liquidity and good to see that you have tried to explain everything about it in simple words I believe this article will be much helpful for beginners and for those who are looking for better explanation on this subject.