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How Does a Single Asset Liquidity Pool Work?

Okay, you have been investing assets on a DEX but noticed a new feature added, the Single Asset Liquidity Pool button, and wondering how it works. It is a convenient option that converts your tokens to the right pool weight to add them to one transaction pool.

Typically swap fees are applied, affecting the pooling ratio in the swap. Therefore, as the tokens are swapped when removing liquidity, you will receive an equivalent amount of each pooled token in proportion to the pool weight. But what does it mean?

What is The Benefit of a Single Asset Liquidity Pool?

When you invest in a liquidity pool, you have a collection of assets where you, the liquidity provider, deposits your assets to use on the platform. Hence, the structure is different from one entity to another.

For instance, when you use a lending platform, it is a single liquidity pool with one asset. In contrast, a DEX has a dual pool making it a total market for specific pairs of assets like USDT, ETH/BTC/DAI, and more. You can find some entities with up to eight assets.

Still, with the new feature added to some platforms, you can add your liquidity to that pool without swapping it to an appropriate entity weight first, as most pools are dual asset pools. So, your transaction will first swap your tokens into the correct weight.

A swap fee is applied proportionally to those tokens you want to exchange for a regular pool. Hence, you only add the amount of the single asset you want to pool. Still, remember that it is the total amount of liquidity you want to add to your transaction.

You also need to pay attention to the initial price impact. When swapping one asset for another, the ratio changes. More traded assets are added to the entity, and some are removed from that pool.

What is The Difference?

How does this new feature compare to adding multiple assets to that entity? When adding a proportional amount of each of your assets, you can add them to a pool without affecting the ratio.

But if you have one asset, you can still swap it for an appropriate amount of the other assets and add it to a pool. Hence, a change happens within the entity ratio equivalent to the price’s impact.

Furthermore, if you have one asset, you can use the single liquidity pool function to help you swap your tokens to allocate them to the correct weight. As you can see, the last two options have the same effect, and there is no difference between them.

Final Thoughts

While the above methods do not differ much, using the feature of swapping first helps correct the weight before adding it to the pool. Hence, you get half a transaction fee with the mitigation of changing the pooling ratio between the swap and entity, saving you time and effort. Furthermore, regardless of what you choose to add to your liquidity when you remove it, you still receive back your equivalent amount of each pooled tokin proportion to the entity weight.

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