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Sifchain Liquidity Pool WARNING

Sifchain Liquidity Pool WARNING

Asymmetric Liquidity Pool

With Sifchain, users can add liquidity to a pool in any ratio. This is called an asymmetric liquidity pool. For example, liquidity providers in a USDc / Rowan pool can supply liquidity in any ratio:  100% USDc, 100% Rowan, or any ratio in between.  

On the surface this sounds like a great idea, but in practice it can lead to the immediate loss of liquidity. The Sifchain asymmetric liquidity pools are not designed to allow investors to provide liquidity to one side of a pool out of convenience.  The asymmetry is designed to incentivize people to provide liquidity so the pools are kept in a 50/50 ratio.  

Providing asymmetric liquidity in a Sichain liquidity pool can lead to immediate loss.

The Sifchain documents do not explicitly explain this.  You need to read the documents and then follow a link to a medium article about asymmetric liquidity, to piece this together.  I highly encourage the Sifchain developers to consolidate the medium article below and the developer docs to make this VERY clear to the liquidity providers.    


How is the Ownership % Calculated when Liquidity is only Provided to one Side of a Pool?

The formula that is used to calculate ownership % is designed to incentivize users to keep the liquidity pool balanced. As one side of the pool increases, users can gain a higher % of the overall pool by adding tokens to the other side.

Below is the formula used to calculate the units owned by a user when they add Rowan or another asset to the liquidity pool.

  • r = rowan deposited
  • a = asset deposited
  • R = Rowan Balance (before)
  • A = Asset Balance (before)
  • P = Existing Pool Units

If the pool gets too oversubscribed on one side, the formula gives users an incentive to add liquidity to the other side by giving them a higher ownership %. This means a user can add liquidity equal to 5% of the total value of a pool and receive ownership equal to MORE than 5%.  The disproportionate ownership stake is created by "taking" ownership from other liquidity providers.

If you provide liquidity in a ratio that will make the pool out of balance (50/50) your position will be impaired when the pool is put back in balance by arbs watching for this imbalance.        

Here’s an example from the Sifchain Medium blog post:

Sifchain Technical Introduction: Advantages of an Asymmetric Liquidity Pool
As our tech team is working hard on building world’s first omni-chain decentralized exchange, we recognize that it is important to educate new community members who are interested but may not have…

Sifchain Support Explanation of Asymmetric Liquidity Loss on Discord

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