Two Common Pitfalls of Liquidity Pools by steemmillionaire

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hive-167922 · @steemmillionaire · Jan 4 '22 (edited)

$15.01

Two Common Pitfalls of Liquidity Pools

Hi everyone,

Last week I started to explore **Diesel Pools** (liquidity pools on Hive), and asked the community for a bit for help. Fortunate, @achim03 picked my post and made a great [video](https://ecency.com/post/@achim03/vlwgqnin) explaining the fundamentals. Thanks a lot for this!

As a summary on very few words, adding liquidity to these pools is similar to opening a sell and a buy order on the same pair, and having a bot adjusting the price automatically to keep these orders at a good market value. This gives other people possibility to convert immediately between the two coins, using the liquidity provided by the pool.

But what are some common pitfalls of Liquidity Pools?
<center>![image.png](https://images.hive.blog/DQmVzuBLf2HBkMPXTKSsKJMziea7TwLqL27Hnd6bzDhymqB/image.png)</center>

### Get familiar with details of the return of investment:
The first thing that I noticed is that the APR (annual percentage rate) might be a bit misleading. People providing liquidity to **Diesel Pools** are rewarded for this from a distinct Reward Pool. Funds in the reward pool are provided by other people that have a kind of interest in promoting one Diesel Pool or another. The first pitfall is that the APR is computed considering all the rewards in that pool, and some of the coins might have very little liquidity on the market, and their trading value might not be so consistent (e.g. you may get tons of **NFTM**. what would you do with it?)  

Some pools have a bonus mechanism that encourage investors to keep their funds in the pool for a long period. This is awesome, but pay attention on the validity period of the Reward Pool. If this is very little, you might end-up accumulating a bonus on a empty pool.

### Understand the market, and how this can influence your initial funds:
As an investor in a Liquidity Pool, you are required to put the same value of tokens on both components of that pair. In my very first investment I provided **20 SWAP.HIVE** and **31939.383 SIM** on the **SWAP.HIVE:SIM pool**. By providing liquidity, you also accept that at the end you might have a different structure on your investment. Especial care must be taken when the market moves towards a certain direction in regards to the pair on which you provided liquidity.

For the example above, with the **Ragnarok** airdrop event coming this week, more and more people are converting **SWAP.HIVE** to **HIVE** for a better allocation. This also mean that more and more people would like to get more **SWAP.HIVE** from their alt-tokens, and the effect is visible on the **SWAP.HIVE:SIM pool**

From my initial investment, only **19.03233742 HIVE** is left, while on the other side I have **33563.279 SIM**. The market value of the earned SIM is **0.91191504 HIVE**, not making for the loss in the HIVE.

I hope you enjoy this. Still, if you have different opinions, please let me know in the comments bellow.

Posted Using [LeoFinance <sup>Beta</sup>](https://leofinance.io/@steemmillionaire/two-common-pitfalls-of-liquidity-pools)

👍 dbuzz, eturnerx, mawit07, taskmaster4450le, steemmillionaire, ecency, leveragetrading, sorin.cristescu, pishio, investegg, yintercept, arcange, imfarhad, shauner, pwrup, lbi-token, ecoinstats, tomiscurious, smartvote, lisamgentile1961, pixelfan, teamvn, adambarratt, laruche, anadolu, captainklaus, myfreebtc, jfang003, ctime, ew-and-patterns, good-karma, steem-holder, eliel, zottonetoken, baycan, seckorama, steemitboard, fatman, curatingunicorn, bilimkurgu, rodent, walterjay, jacuzzi, irivers, centtoken, esteemapp, ph1102.ctp, rbhayes, achimmertens, fff333, mariuszkarowski, igrinov, achim03.ctp, fengchao, achim03.leo, manuelmusic, familyhistory, raphaelle, eddie-earner, jocieprosza.leo, badge-100003, uyobong.venture, plusvault, theroad2freedom, and 20 others

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@beyondhorizonmm · Jan 4 '22 (edited)

$0.04

RE: Two Common Pitfalls of Liquidity Pools

This is the problem of liquidity pools and you need to know when you need to remove liquidity.

👍 steemmillionaire

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@ecency · Jan 4 '22

**Yay!** 🤗<br>Your content has been **boosted with Ecency Points**, by @steemmillionaire. <br>Use Ecency daily to boost your growth on platform! <br><br><b>Support Ecency</b><br>[Vote for new Proposal](https://hivesigner.com/sign/update-proposal-votes?proposal_ids=%5B197%5D&approve=true)<br>[Delegate HP and earn more](https://ecency.com/hive-125125/@ecency/daily-100-curation-rewards)

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@ganjafarmer · Jan 4 '22

$0.10

Yeah after I've dumped so much into the weed cash liquidity pool I'm not exactly sure if I'm going to make anything back however I'm going to hold out hope.

We definitely live in an era of some pretty amazing opportunities.

👍 steemmillionaire

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@steemmillionaire · Jan 4 '22

Yes, we are surrounded by opportunities. But in both directions - to win and to loose. We need to stay informed and educated, so that we are more on the winning side. Thanks for sharing your experience with Weed Cash!

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@jfang003 · Jan 4 '22

$0.12

I suggest entering a pool you are confident in both tokens. For example, you don't mind either one. Otherwise you are probably just hoping that both tokens stay at the same price and you want to collect the yield.

Posted Using [LeoFinance <sup>Beta</sup>](https://leofinance.io/@jfang003/re-steemmillionaire-3lphrc)

👍 steemmillionaire

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@steemmillionaire · Jan 4 '22

$0.83

Yes, this is also the conclusion that I reached.

👍 steemmillionaire, jfang003

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@taskmaster4450le · Jan 4 '22

$0.05

There is a lot to all of this, more than meets the eye.  A great reminder for people to research before entering things of this nature.

Sometimes the best option is to stick with the simple and consistent.  That is my strategy anyway.

Posted Using [LeoFinance <sup>Beta</sup>](https://leofinance.io/@taskmaster4450le/re-steemmillionaire-47gamm)

👍 steemmillionaire

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@yintercept · Jan 4 '22

$0.35

I put some money in the SWAP.HIVE:BEE pool.  I now have a bunch of NFTM coins.

I think the best way to add liquidity in the HIVE ecosystem is simply to have some liquid funds to move around between the different coins.

Unfortunately, I keep falling for the desire to stake all of my tokens.

Posted Using [LeoFinance <sup>Beta</sup>](https://leofinance.io/@yintercept/re-steemmillionaire-6pohs1)

👍 yintercept, steemmillionaire, vagabondspirit, irivers

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@steemmillionaire · Jan 4 '22

Exactly! This NFTM is a very odd token.

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@yintercept · Jan 4 '22

I suspect that the NFTM was created to be the base for an NFT collection. So, it is now a coin without a use case.

Posted Using [LeoFinance <sup>Beta</sup>](https://leofinance.io/@yintercept/re-steemmillionaire-3vcbfd)

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