2023-04-12 20:26:13
We’ve written a few articles on liquidity pools, but we decided to dive deep into the mechanics and the formula, x*y=k, that controls most pools in
our brand new article:https://pontem.network/posts/liquidity-pool-mechanics
Liquidity pools gave DeFi a way to offer speedy and liquid trades, a way to compete with centralized exchanges.
The formula x*y=k controls many liquidity pools, where x is the amount of one crypto in the pair, y is the amount of the other, and k is a constant value.
The total liquidity in the pool must stay constant throughout a trade, but this means that the price changes in response to a change in the ratio of assets.
In big pools, this change in price is minimal. But in small pools, this change in price can be HUGE and lead to losses. One guy even lost $2M in an illiquid pool
We use that person as an example and talk about the mechanics of liquidity pools much more in detail in our new article. We even discuss the advanced formula for correlated swaps.
Check it out!
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