How Liquidity Pool works on Unstable pair part I

Disclaimer

This is base from how I understand liquidity pools and for educational purposes only. If you notice any mistakes I will appreciate if you will leave a comment below and point it out! Arigato gozamaisu! Meow

Last time I have published an article discussing about the liquidity pool when you pair both unstable and stable coin in one pool.

If you haven't seen that one yet, you can visit the link below,

How liquidity pool works.

So you can easily follow how everything is going around on the computation below.

Moreover,

The objective of this article is to discuss about the following scenario on what is happening inside the pool when,

1. Both of the tokens price increased with the same percentage.

2. Both of the token increased but with different percentage.

3. Both of tokens price decreased but with the same percentage

4. Both of the tokens price decreased but with different percentage.

5. One of the tokens price increased and the other one decreased.

I hope you are all aware that when you put both your tokens in a pool, the pair inside must be balance irrespective to the price of the individuals price. That will keep both your pair at risk with impermanent loss.

Impermanent loss is the amount of money that can be loss from your initial capital during your LP farming.

Heya. I would like to go on further with the discussion.

Let us say, you have an initial capital of 100$ you want to farm eben and you have seen that the most profitable pool farm is spice-bch because it has a high apr.

Lets allocate your initial investment,

There are several cases that might happen on the pool and since both of your pair is unstable, the market price changes from time to time.

Here are the following cases,

Case I. When both of the tokens price increase at the same time : say both increase to 30%

To get the 30% increase of the initial price when you put your token on the pool, you just have to multiply the initial price to 1.3.

0.00064 x 1.3 = 0.000832 per spice

670 x 1.3 = 871 per bch

Now that the price increased to 0.000833$ per spice and 871$ per bch, let us see what will happen on your pool.

You just have to multiply your initial quantity pooled of spice and bitcoin cash and multiplying both on each individual increased price.

78125 x 0.000832 = 65$

0.074626866 x 871 = 65$

Since both the token price increased with the same percentage nothing will happened on your pool token they will remain as is.

Always remember that a pool needs to be balance. Since both of your pair increase you will gain the same amount of $ from each of your pair.

More like, If token A and token B increased at the same time with the same percentage increase, the quantity on the pool remain as is but the value of your initial capital in $ increased.

CASE II. Both tokens price increase but, say for example spice increase 50% and bch increase 30%.

Same procedure you just have to multiply the initial price by 1.5 and 1.3 on spice and bch respectively.

0.00064 x 1.5 =0.00096$/ spice

670 x 1.3 = 871$/bch

Same procedure from above we have to compute the current price of the initial pooled token. As you can see from the below attached photo, when the price of spice increase to 50% the token value increases same with bch but with lesser increase than spice. Since the result is unbalanced we need to balance both of the $ value in the pool giving as a total of 70$ each.

After that as we look from the right side the quantity of spice is lesser than of the initial value and if you look unto the qty of bch vs the previous quantity the value increases.

In conclusion whichever of the pair that increase the price much higher than of the other, the original pooled token will be less in terms of quantity.

More like, if token A increased in price more than token B, the quantity of token A in the pool becomes lesser and quantity of token B increases. Vice versa. And at the same time your initial capital in $ also increased.

I have to cut it into two separate articles to discussed the three other cases. I think this one is a bit too much. Lmao.

In my next article I will provide you with a copy of an excel file so you could also monitor your own Liquidity Pool. You just need to have the quantity when you initially pooled your token.

The advantage of knowing what is happening on your liquidity pool is awesome!

If you noticed any mistakes, please comment down below. 👇👇👇👇

Again thank you for reaching this far!!

You rock mate :)