Remix Eth Pulse / Knowledge library · Foundations · 2 min read
A position changes its inventory
An automated market maker lets traders exchange assets against a pool using programmed pricing rules. Liquidity providers contribute assets and receive a claim defined by the pool design. That claim changes in composition as trades occur; it is not simply a fixed bag of the original tokens plus free fees.
For a basic constant-product pool, reserve quantities follow a curve commonly expressed as x × y = k, ignoring fee details. A trade changes the reserve ratio and therefore the marginal price. Other AMM designs, including concentrated liquidity, introduce different position behavior and management requirements.
A hypothetical constant-product pool
Imagine a pool starts with 100 units of token A and 10,000 units of token B. Its starting product is 1,000,000. Ignoring fees, adding 10 A leaves the pool with 110 A and about 9,090.91 B, allowing roughly 909.09 B to leave. The average execution price differs from the starting marginal ratio.
A provider owning 10% of the pool before a proportional withdrawal receives 10% of the resulting reserves, subject to the design’s accounting. That provider now owns a different mix of A and B. If A rises in the wider market, arbitrage trades can move pool inventory toward more B and less A.
Compare the withdrawal value with the value of simply retaining the original assets. The difference is often called divergence or impermanent loss, though “impermanent” can mislead: withdrawing crystallizes the position’s outcome, and a price reversal is not guaranteed. Fees may offset some difference but do not automatically exceed it.
Fees require useful trading activity
Fee income depends on actual trades, the fee schedule, active liquidity, and the position’s share. Incentive tokens add another source of returns with separate price and distribution assumptions. An advertised percentage combining both can conceal which component is sustainable without subsidies.
Concentrated liquidity allows capital within chosen price ranges. A position can stop earning certain swap fees when price leaves its active range and may become mostly one asset. Comparing its headline return with a broad-range position requires matching market movement, time, fees, and rebalancing costs.
Assess the full position
- Identify pool version, fee tier, asset contracts, and any hooks or additional logic.
- Estimate inventory composition under several hypothetical price moves.
- Separate earned trading fees from incentive-token distributions.
- Compare outcomes with holding the same starting assets.
- Include rebalancing fees, approvals, and exit costs.
For a learning exercise, record a small position’s initial asset quantities and later withdrawal quantities. Value both the pool claim and the untouched starting portfolio using the same prices at the same time. This prevents a rising market from disguising a weaker result relative to the relevant alternative.
Frequently asked questions
Are pool fees guaranteed yield?
No. Trading activity, competition, market movement, contract behavior, and asset prices affect the result. Fee income is only one part of the total outcome.
Does high total liquidity mean every trade is cheap?
No. Useful liquidity depends on the asset pair, price range, route, and order size. Total value alone does not describe depth at your execution price.