A different and simpler explanation!
• Liquidity pools in DeFi commonly operate using the "Constant Product Market Maker" model, which requires an equal USD value for a pair of tokens.
• Liquidity providers use Symmetric Deposits to contribute a manually balanced amount of two tokens to a pool and Symmetric Withdrawals to retrieve them back.
• Liquidity providers use Asymmetric Deposits to contribute only one asset to a pool and Asymmetric Withdrawals to receive only one asset back, however the pool always converts and handles half of these amounts to the second asset under the hood.
When becoming a Liquidity Provider (LP), one of the most confusing concepts revolves around Symmetrical and Asymmetrical deposits or withdrawals. What are these? Why do they exist? What is the difference between them? Let’s dig in a little more.
The answer to all these questions lies in the balance formula commonly used in AMMs. Liquidity pools commonly work under the "Constant Product Market Maker" model, which means they balance a pair of assets using the equation k = x * y. In it, the variables 'x' and 'y' represent the quantities of the two tokens in the pool, and 'k' is a constant value.
In layman's terms, this means that most pools in DeFi are composed of two tokens, each with 50% of the total USD value of the pool, and that, to reduce or retire one of the tokens one needs to deposit or fill in with the other one. If you haven’t, we suggest you read our article on how AMMs work before proceeding.
Let’s imagine that ETH is worth $100 and $CACAO is worth $1 for a moment. In this case, a balanced ETH/CACAO pool could have 1 ETH and 100 CACAOs, or 2 ETH and 200 CACAOs, or 50 ETH and 5,000 CACAOs, because all of these examples imply a ratio of 100:1, or 100 CACAOs for every one ETH.
Pools are not static of course, and their composition can sometimes be changed. Specifically, traders alter the ratio of assets in the pool because they take out one of the coins and deposit the other (i.e., they buy one coin and pay with the other), however imbalanced pools present an opportunity for smart arbitrageurs to make a profit, which means that they remain in such a state for only brief periods of time. You can read more about this behavior here.
In contrast, LPs can only increase or reduce the size of a pool if they comply with the original pool’s ratio. For instance, an LP could want to deposit 100 CACAOs and one ETH to our previous example pool, and would thus need $101 dollars.
To achieve this, this LP could decide to manually buy the correct quantity of both tokens and then contribute them to the pool with a Symmetric Deposit, or to contribute all of his capital using only one of both assets and letting the pool split it into the appropriate ratio with an Asymmetric Deposit.
Liquidity withdrawals work in the same way. Our LP could choose to retrieve their two separate assets using a Symmetric Withdrawal, or opt for an Asymmetric Withdrawal, where the pool converts the recovered liquidity into only one asset before handing it over.
Except for larger Asymmetric liquidity operations - which can incur fees or where the automatic conversion of assets alters the pool balance in a meaningful way - the difference between Symmetric and Asymmetric LPing is basically a user experience enhancement. As you can see, all deposits and withdrawals end up being balanced into the correct ratio to enter or exit a pool and, eventually, LPs exposure to yield, to both assets’ prices and even to impermanent loss remains the same.
Understanding the mechanisms of liquidity pools, including symmetric and asymmetric deposits and withdrawals, is key to successful participation in the DeFi ecosystem. That is why we write and publish a new technical Maya Academy article every week. You can join our official Discord Server to let us know what you think about these, suggest new articles and stay in touch with our growing community. See you there!
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