Weighted Pools

Overview

Weighted Pools are a generalization of the constant product model AMM standard popularized by Uniswap. In fact, our “Weighted Pools” are also known as “Automated Index Funds” in other DeFi protocols and ecosystems.

Each Weighted Pools Fund (i.e.: each of these pools)can contain up to 8 different tokens. Upon creation, every asset is assigned a weight that represents how much of the pool each asset should make up at any given moment in time.

The equation Wavelength uses for these kind of pools is Balancer's generalization of X*Y=K, which enables unequal token weights and more assets to be in the pool:

Where V is a constant, B is the balance of an asset, and W is the weight of an asset in the pool. As the price of each token fluctuates, traders and arbitrageurs unintentionally rebalance the pool by carrying out swaps/trades that become profitable due to pool imbalances. In this model, the desired weight of each token is maintained while trading fees are collected from traders and paid out to Liquidity Providers.

Weighted t Pools turn the concept of an Index Fund and add a twist: instead of paying fees to portfolio managers who rebalance your portfolio to ensure the desired exposure, you collect fees from traders who rebalance your portfolio by pursuing arbitrage opportunities. Each pool can contain up to 8 different tokens, each with its own share of the pool.

Advantages

Exposure Control

Weighted Pools allow users to choose their levels of exposure to certain assets while maintaining the ability to provide liquidity. The higher a token's weight in a pool, the less impermanent loss it will experience in the event of a price surge.

Impermanent Loss

For pools where, say, token A weighs significantly more than other tokens in the pool, there is far less impermanent loss for Liquidity Providers. However, there is a catch. Highly asymmetric pools will cause greater slippage for trades due to the fact that one side has much less liquidity.

Regarding the optimal weightings, 80/20 pools have emerged as an optimum medium when balancing liquidity and seeking Impermanent Loss mitigation.

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