Starbank Academy— Weighted Pools
Starbank Finance, which is based on Balancer V2, is releasing several types of pools. These pools consist of:
· Weighted Pools
· Stable Pools
· Meta Stable Pools
· Liquidity Bootstrapping Pools
Each of these pools employs a different strategy which means it’s important for the investor to understand exactly what they’re getting into. We will be covering each one of these pools to explain how they work.
What is a weighted pool?
In simple terms, a weighted pool is a type of liquidity pool that is more versatile. A typical liquidity pool is designed to have a ratio of 1:1 for the pair it is a part of. A weighted pool could have a different ratio, such as 2:1, or it could have more than two assets in it. More specifically, weighted pools can have up to 8 different assets inside. It enables the investors who provide liquidity to balance their risk by investing in a pool that has multiple assets in them rather than a basic pool that only allows 2 assets at a 50:50 ratio.
Perks of a weighted pool
Right away, the main perk to weighted pools is the diversification that it offers. To many investors, diversification is the main way they distribute market risk. Weighted pools are just one way that an investor can have money in a liquidity pool but still hedge their bets to lower the risk they are accepting.
One of the biggest risks of participating in a liquidity pool is the possibility of experiencing impermanent loss. In simple terms, impermanent loss is the unrealized loss you experience if you put funds into a liquidity pool and the funds drastically change in value. This leads to the liquidity pool rebalancing, thus leaving you with a loss. Weighted pools help limit this risk by changing the ratio of the assets inside. Below is a graph that shows the difference in impermanent loss as the ratio changes.
Let’s say we had 8 different assets in our weighted pool, this allows for a deleveraging of risk for each asset invested because if three assets increase in price and another two assets move down in price then there is a balancing effect that strengthens the pools liquidity. The swing isn’t too drastic. Whereas, in a pool of two assets at a 50:50 ratio, if one asset moves down in price then the liquidity of the pools gets dragged down quickly.
Weighted pools utilize the Weighted Math AMM to automatically rebalance assets within a pool every time a trade is made, similar to exchange traded funds (ETF’s) and index funds. The configuration always tries to bring the weighted pool back to the desired ratio of assets to maintain their risk standards.
In conclusion, weighted pools are an incredibly powerful asset to have if done correctly. Most importantly, they can be used to diversify a liquidity pool or even help negate impermanent loss.