Weighted Pools

Weighted Pools are a sophisticated evolution of traditional Automated Market Maker (AMM) pools, originally made popular by Uniswap v1. These pools utilize Weighted Math, making them highly adaptable and suitable for a wide variety of use cases, especially for tokens without a direct price correlation (such as APT and WBTC). Unlike conventional AMM pools that typically use a fixed 50/50 ratio, Weighted Pools allow for more flexible configurations. Users can create pools with multiple tokens and customize weightings, such as 80/20, 60/20/20, or other combinations. This flexibility enables more advanced strategies and better alignment with market conditions or personal preferences.

Advantages of Weighted Pools

1. Exposure Control One of the primary benefits of Weighted Pools is the ability to fine-tune exposure to specific assets while still participating in liquidity provision. By adjusting the token weight within the pool, users can manage both their risk and potential rewards. A higher weight allocated to a particular token within the pool reduces impermanent loss in the event of a price increase for that asset. This allows users to strategically allocate assets based on their market outlook.

   For example, if a user is providing liquidity for WBTC and WETH, they can choose a weighting that reflects their investment strategy. A pool with a greater allocation to WBTC indicates an expectation that WBTC will see stronger gains, reducing the risk of impermanent loss for that token. Conversely, a pool weighted more heavily toward WETH suggests that the user anticipates stronger performance for WETH. In cases where both tokens are expected to maintain a relatively stable value ratio, a 50/50 pool might be the optimal choice.

2. Impermanent Loss Management Impermanent loss is a critical concept in liquidity provision, describing the difference between holding assets outright versus providing liquidity for them. When token prices shift, this can result in impermanent loss, which impacts overall profitability.

   Weighted Pools help mitigate impermanent loss by allowing for uneven weightings between tokens. In pools where one token is more heavily weighted than the other, impermanent loss is minimized, especially when the price of the higher-weighted token rises. However, this advantage comes with a tradeoff: pools with more uneven weightings may experience greater slippage during swaps due to reduced liquidity on one side of the pool.

   For instance, an 80/20 pool strikes a good balance. The more heavily weighted token (80%) faces less exposure to impermanent loss while still maintaining enough liquidity to ensure efficient swaps. This configuration has become a popular choice for liquidity providers looking to balance liquidity provision with impermanent loss mitigation.

3. Customizable Liquidity Strategies Weighted Pools give users more control over how they provide liquidity and manage portfolio risk. Unlike the traditional 50/50 model, these pools allow liquidity providers to align their asset allocations with their market forecasts. They are ideal for those looking to minimize impermanent loss for specific tokens while still providing liquidity for other assets. The ability to customize token ratios enables users to adapt to varying market conditions, making Weighted Pools a powerful tool for more sophisticated liquidity strategies.