Do I get original amount back when I withdraw my liquidity from Sundaeswap liquidity pool?
The question may sound dumb, but when one token in the pair has increased or decreased a lot, it seems withdrawing the original amount will distort the pool a lot.
For example, suppose at the beginning 1 ADA = 5 Sundae. So I provided 1 ADA + 5 Sundae tokens to the liquidity pool. When I withdraw my liquidity, suppose now 1 ADA = 1 Sunday. What do I get back when I withdraw all my liquidity?
- 1 ADA + 5 Sundae (original amount; fair but will distort pool ratio further)
- 1 ADA + 1 Sundae (keep the pool ratio but take lower bound)
- 5 ADA + 5Sundae (keep the pool ratio but take higher bound)
- 3 ADA + 3 Sundae (keep the pool ratio but take medium)
- or else?
As far as I understood it, you get your share of the liquidity pool back.
So, if you put in 1 ADA + 5 SUNDAE, and all the others put in 9 ADA + 45 SUNDAE, your share is 10 % of the 10 ADA + 50 SUNDAE in the pool.
If someone buys for 2.5 ADA at this price, they get 12.5 SUNDAE, and there are 12.5 ADA and 37.5 SUNDAE in the pool after the deal. So, your share would be 1.25 ADA and 3.75 SUNDAE, now, and the exchange rate is 1 ADA to 3 SUNDAE.
Now, some more people provide liquidity at this rate. For simplicity, they double the pool. It is now 25 ADA and 75 SUNDAE. Exchange rate is still 1 ADA to 3 SUNDAE, but your share is now 5 % of the pool, still 1.25 ADA and 3.75 SUNDAE.
Another one buys for 12.5 ADA at this price, so that there are now 37.5 ADA and 37.5 SUNDAE in the pool. Exchange rate goes to 1 ADA to 1 SUNDAE and your 5 % of the pool are 1.875 ADA and 1.875 SUNDAE.
Another sequence of trades could have led to the same 1:1 rate, but with a different absolute share. And the liquidity should normally be so much higher than the swap volume that the effects are smaller.
Great explanation! This makes a lot of sense to me as it addresses my hidden math question behind AMM. Love to get others to confirm. Thanks.