[GUEST ACCESS MODE: Data is scrambled or limited to provide examples. Make requests using your API key to unlock full data. Check https://lunarcrush.ai/auth for authentication information.]  CSWAP | DEX [@CswapDEX](/creator/twitter/CswapDEX) on x 19.7K followers Created: 2025-07-17 00:27:37 UTC DEX Liquidity Pool Mechanics & Understanding Impermanent Loss How Liquidity Pools Work When you provide liquidity to a pair (e.g., SNEK/ADA), you receive LP tokens representing your share of the pool. As users trade against the pool, the ratio of the two assets changes to maintain the AMM formula (e.g., constant product). This means the value of your LP tokens fluctuates over time. When Is Providing Liquidity Most Favorable? A) The price ratio of the two assets remains relatively stable over time. B) Both assets are stable or appreciating in price. What is Impermanent Loss? In yesterday’s post, we mentioned impermanent loss. Impermanent loss is the difference between the value of your LP position and what you would have had by simply holding the two tokens outside the pool. It’s called “impermanent” because the loss is only realized when you withdraw your liquidity, and can be partially or fully offset if prices return to their original ratio. If the price ratio of the two assets diverges significantly, impermanent loss increases. Typical impermanent loss (for 50/50 pools): 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 (Table source: Binance Academy, Impermanent Loss Explained) If one asset moves sharply relative to the other (compared to when liquidity was provided), the LP can experience significant impermanent loss. This effect can be even worse if both assets also decline in price, reducing the overall value of your position. Why Liquidity Provision Still Makes Sense Liquidity providers can earn substantial yields from transaction fees and may receive additional incentives (such as farming rewards), which can offset or even outweigh impermanent loss over time. In high-volume pools with strong incentives, LPs can perform well despite price volatility. Liquidity providers can also benefit in choppy and sideways markets—not just during bull markets. However, in broad declining markets, even if the relative ratio of the two assets remains stable (meaning minimal impermanent loss), the absolute value of the LP position can fall along with the prices of the underlying assets. Fees and incentives can help offset this, but may not fully compensate for large market-wide declines. This is why risk management is important for liquidity providers. Strategies such as choosing pools with assets you believe in long-term, diversifying across multiple pools, or allocating only a portion of your portfolio to LP can help manage downside risks in volatile or declining markets. Liquidity provisioning remains a compelling yield opportunity and a cornerstone of decentralized finance. XXXXX engagements  [Post Link](https://x.com/CswapDEX/status/1945641504359522410)
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CSWAP | DEX @CswapDEX on x 19.7K followers
Created: 2025-07-17 00:27:37 UTC
DEX Liquidity Pool Mechanics & Understanding Impermanent Loss
How Liquidity Pools Work
When you provide liquidity to a pair (e.g., SNEK/ADA), you receive LP tokens representing your share of the pool.
As users trade against the pool, the ratio of the two assets changes to maintain the AMM formula (e.g., constant product). This means the value of your LP tokens fluctuates over time.
When Is Providing Liquidity Most Favorable?
A) The price ratio of the two assets remains relatively stable over time.
B) Both assets are stable or appreciating in price.
What is Impermanent Loss?
In yesterday’s post, we mentioned impermanent loss.
Impermanent loss is the difference between the value of your LP position and what you would have had by simply holding the two tokens outside the pool. It’s called “impermanent” because the loss is only realized when you withdraw your liquidity, and can be partially or fully offset if prices return to their original ratio.
If the price ratio of the two assets diverges significantly, impermanent loss increases.
Typical impermanent loss (for 50/50 pools):
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
(Table source: Binance Academy, Impermanent Loss Explained)
If one asset moves sharply relative to the other (compared to when liquidity was provided), the LP can experience significant impermanent loss. This effect can be even worse if both assets also decline in price, reducing the overall value of your position.
Why Liquidity Provision Still Makes Sense
Liquidity providers can earn substantial yields from transaction fees and may receive additional incentives (such as farming rewards), which can offset or even outweigh impermanent loss over time. In high-volume pools with strong incentives, LPs can perform well despite price volatility.
Liquidity providers can also benefit in choppy and sideways markets—not just during bull markets.
However, in broad declining markets, even if the relative ratio of the two assets remains stable (meaning minimal impermanent loss), the absolute value of the LP position can fall along with the prices of the underlying assets. Fees and incentives can help offset this, but may not fully compensate for large market-wide declines.
This is why risk management is important for liquidity providers. Strategies such as choosing pools with assets you believe in long-term, diversifying across multiple pools, or allocating only a portion of your portfolio to LP can help manage downside risks in volatile or declining markets.
Liquidity provisioning remains a compelling yield opportunity and a cornerstone of decentralized finance.
XXXXX engagements
