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Pool Weighting

DeFi Strategies

Pool Weighting refers to the proportion or ratio of different assets supplied within a liquidity pool on a decentralized exchange (DEX) or DeFi platform. It determines how much of each token is required or maintained in the pool—commonly seen in pools like 50/50 (equal value of both assets), 80/20, or custom configurations. Pool weighting affects impermanent loss, price impact, and the overall yield potential for liquidity providers.

Use Case: Pool weighting lets a DeFi user provide 80% $ETH and 20% $USDC to a weighted pool, gaining exposure to ETH price movement while reducing the risk of one-sided impermanent loss.

Key Concepts:

  • Liquidity Pool — A smart contract that holds two or more tokens and enables decentralized trading and yield generation.
  • Impermanent Loss — The temporary loss experienced by liquidity providers due to price changes in pooled assets compared to simply holding them.
  • AMM (Automated Market Maker) — A protocol that uses liquidity pools and algorithms to price and swap tokens.
  • Yield Farming — Earning passive returns by providing liquidity or participating in DeFi protocols.

Summary: Pool weighting gives liquidity providers flexibility to manage exposure and tailor their yield strategies. By adjusting ratios between assets, users can align pools with their risk tolerance and market outlook while still participating in DeFi incentives.

Pool Weighting Equal Weight (50/50) Custom Weight (e.g., 80/20, 95/5)
Description Both assets are provided in equal value, maximizing balance but increasing exposure to impermanent loss if prices diverge. Assets are provided in set ratios favoring one side, often used to limit exposure or tailor risk/reward for providers.
Typical Use Case Standard AMM pools for most trading pairs. Balancer, Beethoven X, or custom pools that allow for strategic allocation (e.g., majority stablecoin, minority volatile asset).
Effect on Yield Yield is split equally between both assets. Higher risk of impermanent loss on large price movements. Yield is concentrated in the dominant asset, with reduced risk if weighted toward a more stable or preferred token.
 
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