Liquidity Pool Notes

Brief reminders about liquidity pools and their implications.

Most astute farmers in DeFi are somewhat familiar with how Liquidity Pools work. Combine assets, receive yields. When you go to redeem and "break" your LP, there are a few additional mechanisms that are especially relevant when there are 3 or more assets in the LP that we feel important to discuss.

When you deposit assets into a liquidity pool, you recieve LP tokens in exchange. On StableQuant, these are called QLPs, but you may be more familiar with CAKE-LPs. Imagine these like a reciept for your deposit. The quantity of LP you receive represents your share of the pool. Each liquidity provider owns a portion of the total assets in the pool. Here's why that's important here.

Example: You deposit 1000 BUSD into the QUSD-3Pool liquidity. You then receive a number of QUSD3P-QLP that can be staked. One would imagine that when redeemed, this LP is 25% QUSD, 25% BUSD, 25% USDC, and 25% USDT. However, if someone were to deposit a lot of USDC after you create your LP, your asset ratios may be slightly off when you go to break the LP and claim the underlying assets should you redeem before arbitrage occurs.

This is because your LPs are actually ownership of a portion of the pool as a whole. When you withdraw, you will receive assets in proportion to what's currently in the pool. Normal market forces such as arbitrage, swaps, and trading keep these ratios mostly in harmony, but you may experience some discrepencies. Luckily for StableQuant users, all assets are very close to $1. This means if you receive a little bit more USDC than USDT when you go to redeem your LP, you aren't losing out on any value, and there is no cause for concern. This is entirely expected, the underlying ratios in the pool will fluctuate. So even if you deposit equal parts of all assets, do not be surprised if you receive different ratios when it's time to redeem your LP. If you have further questions, don't hesitate to reachout to us in Telegram for further clarification.

Stay quantified!