Hello, I am super new to this whole space, so forgive me if this sounds like an obvious or stupid question. I was reading up on impermenant/divergence loss and I think I have a reasonable handle on it at a high-ish level.
All the examples I have seen postulate that you enter the pool with some ratio of ALL the pool tokens. But there are some pools (all pools?) that allow one to provide liquidity for only a single token in the pool. How does that work wrt divergence loss?
If I am grasping the idea correctly in the scenario that we have say an 80/20 AAVE/WETH pool, and someone uses the pool to swap WETH for AAVE (so +WETH, -AAVE). This throws the pool ratio off and will cause the pool AAVE price to increase to attract current AAVE owners to swap their AAVE in exchange for WETH, re-balancing the pool and netting the AAVE contributor(s) a profit as they get more WETH for their AAVE than they could get elsewhere.
This makes sense, and if I contribute both tokens initially it stands to reason that some portion of the withdrawn AAVE in the original WETH->AAVE swap was my original AAVE and thus I have a claim on slightly less AAVE and slightly more WETH (before arbitrage).
But if I ONLY contributed AAVE it seems I can’t have any kind of claim on the WETH side of the pool, so does that mean in every such transaction I only end up with less AAVE?
Is the idea that the arbitrage will return the pool to the proper balance and in the end I will have a claim on the same amount of AAVE as before the swap + arbitrage, or will I always lose some fractional amount due to the arbitrage happening?
I guess a further question on the ‘only provide one token to the pool’ scenario is, doesn’t my deposit itself throw the pool out of balance and trigger arbitrage immediately?
In your example of adding AAVE to an 80/20 AAVE/WETH pool, you’d be performing a function equal to trading 20% of the AAVE to WETH through the pool (swap fee included) and then adding it to the pool. What actually happens mechanically is that your assets are added to the pool and you receive the equivalent BPT had you performed the above actions. You’d essentially be buying the existing LPs WETH from them to join the pool.
Whether a trade happens would depend on a few factors, like the size of the pool and the ratio that the added tokens shifted it from its weights relative to outside market prices. Also, the ever-present problem of gas prices.
If the added value pushes the new price into a threshold where it’s either arbitrage-able or simply the best price to trade, then yes someone will come along and trade against it, adding the WETH that would then be in demand for some value of the AAVE that you added. It could be possible that the price was moving in that direction anyway and there isn’t an immediate trade necessitated.
Whatever profit/gain/rate a trader makes from that would basically be their reward for keeping the pool balanced.
Once you’re an LP you’d be able to pull out either the 80/20 AAVE/WETH ratio, or do a single-side withdraw of either asset. Doing another single-side would again see a swap fee on the amount traded through the pool, and it should warn you somewhere on the UI how much slippage or price impact you’re seeing.
You would also see any Impermanent Loss from that start position, if AAVE goes up then it’ll be sold for more eth and vice versa, changing the overall amount(s) that you could withdraw.
There are limits, Limitations - Balancer As you approach the 1/2 deposit limit and 1/3 withdraw limit of the total token amount you start seeing major slippage, as you’re adding or removing a large portion of the market. This is why it’s generally a better idea to add all assets, but sometimes with fees of additional trades if you’re starting off without the other(s) it can still be economical to do the single-add depending on scale.
V2 says it will allow 16 tokens in a pool, I can see someone choosing single-asset additions as a welcome alternative to doing 15 trades and an LP addition, depending on circumstances.
Here’s the section in the whitepaper about single-asset, Whitepaper - Balancer I hope I represented it accurately.