Source: GooseFX

Liquidity pools are a common term in the web3 space, especially in the DeFi niche. As regards DeFi, liquidity pools are pools containing various tokens that are locked in smart contracts. They make crypto trading easy because when there are different tokens, there are options to choose from. Those tokens don’t appear in the pools by magic, they are supplied by individuals (you and me), and people who provide liquidity are called liquidity providers. Liquidity providers (LPs) earn some incentives for providing liquidity for pools.

Typically, providing liquidity involves depositing two tokens of a liquidity pair. Say, you want to provide liquidity for the ETH/BTC pool, you’ll be required to deposit ETH and BTC in corresponding proportion, i.e., the dollar value of ETH deposited will be equal to the dollar value of BTC deposited. This is the most common form of liquidity provision. However, there is a new method of providing liquidity that doesn’t require liquidity providers to deposit both tokens in a pool. This type of pool is referred to as a single-sided liquidity pool.

WHAT ARE SINGLE-SIDED LIQUIDITY POOLS?

Single-sided liquidity (SSL) pools are liquidity pools that allow liquidity providers to deposit only one asset of a pool instead of the pair and still earn yield. This is similar to staking or traditional depositing of assets. It makes it easier for more liquidity providers to participate as there is no hassle of having to provide for both tokens of a pair. It can also be well utilized by companies or individuals that hold large amounts of a particular token.

Examples of protocols utilizing single-sided liquidity pools include GooseFX, Uniswap v3, Concordex, Aave, Cryption Network, Compound, etc.

TYPES OF SINGLE-SIDED LIQUIDITY POOLS

Token-Only SIngle-Sided Liquidity Pools: just like we’ve described before now, this type of single-sided liquidity pool requires users to provide liquidity for only one token of a pair, thereby making liquidity provision convenient to participate in. Once a token is deposited in this kind of pool, it will automatically be paired with another token with an equivalent value.

For instance, if I deposit $300 worth of SOL in a single-sided liquidity pool, the pool will automatically pair it with $300 worth of USDC, assuming the pool has an existing SOL/USDC pair.

Non-Equal Weight Pools: this is another type of single-sided liquidity pool that allows liquidity providers to supply an unequal amount of the two tokens of a pair in a liquidity pool. Recall that traditional liquidity pools require the two tokens deposited to be of equal $$$ value. However, this pool is the opposite of that as it allows for the value of one asset of the deposited pair to be higher or lower than the other. The protocol in this case is responsible for balancing the pair.

Side note: It's crucial to note that depositing assets in single-sided liquidity pools does not avoid the risk of impermanent loss any more than traditional liquidity pools do. However, it’s a bit better in that only one token is locked instead of two.

What is Impermanent Loss?

When market price fluctuations cause the value of the assets outside the liquidity pool (not locked) to differ from the value of the assets within, this is known as an impermanent loss.

Simply put, impermanent loss is the loss one accumulates for locking a token in a liquidity pool instead of selling as a result of a shift in the price of the token (in a case where the token price pumps).

Finally, it is worth mentioning that locking tokens in liquidity pools is risky, take for instance in the case of an impermanent loss, thereby it is strongly advised that you DYOR before any decision to participate in liquidity provision or even staking.