x * y = k
. Liquidity Providers (LPs) lock their tokens in a pool at a certain ratio of x
to y
that determines the price the pool offers to the community.k
of the pool. In cases where the liquidity pair does not exist, you get to set the ratio of the liquidity pool by the amounts of tokens you choose to provide.SEFI
tokens, the Secret Finance governance token, as a reward. Currently, the pairs with rewards available are:sDAI
and 10 sSCRT
to the liquidity pool and own 100% of the pool. If the market price of sSCRT
increases to 4 sDAI
, arbitrageurs will buy sSCRT
until the pool's price reflects the market price. This removes sSCRT
and adds sDAI
to the pool until the pooled tokens are 35 sDAI
and 8.6 sSCRT
.sSCRT
would now be worth $40. With the pool exchanging some of the tokens, the 8.6 sSCRT
is now worth around $34. The difference of $6 is the impermanent loss. It is referred to as impermanent because the pool tokens are in constant flow and the amounts will continue to change. Once the LP withdraws the tokens from the pool, this loss would become permanent. This risk is why incentives are provided to compensate Liquidity Providers. If you're interested in calculating impermanent loss, click here for a compatible calculator.