Curriculum·J303 Liquidity Provision and Impermanent Loss·about 30 min
What providing liquidity actually is
By the end of this lesson you can
- →State what an LP position is a claim on, and what it automatically does with your capital
- →Explain why a pool converts you into the asset that is falling
- →Compute the composition of a position after a large price move
- →Identify the trade you are agreeing to make on every future price change
Junior · enrolled learners
This lesson opens with The Curve UST pools, May 2022.
- What happened
- Curve hosted the deepest market for Terra's UST. On 7 May 2022 Terraform Labs moved $150M of UST from the UST and 3CRV metapool into the newly launched 4pool. As the peg came under pressure, traders sold UST into those pools and withdrew the other stablecoins, and the 4pool's UST share reached about 85 percent. Liquidity providers who remained were left holding overwhelmingly UST. Analysts observing the pool balances noted the divergence in advance of the wider collapse, because the composition of a pool is public and updates continuously.
- The decision point
- No liquidity provider in those pools decided to buy UST as it fell. The pool bought it for them, automatically, on every trade, because that is what the mechanism does. A liquidity position is a standing agreement to sell whichever asset is rising and buy whichever asset is falling, executed without consultation, and its most extreme outcome is holding all of the one that went to zero.
What you will be able to answer
- →What is a liquidity position a claim on?
- →What does the mechanism do with your capital?
- →What is the extreme outcome of an LP position?
- →Who is the counterparty to a swap?
Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.
It is free. We do not sell the list and there is nothing to buy at the end of it.
Sources and review
- https://blog.kaiko.com/predicting-the-ust-collapse-with-dex-liquidity-pool-data-6e8d6e62660
- https://www.chainalysis.com/blog/how-terrausd-collapsed/
- https://arxiv.org/abs/2205.08904
- https://cryptoslate.com/new-report-shows-50-of-uniswap-v3-liquidity-providers-are-losing-money/
Confidence high·Volatility low·Reviewed 2026-08-06·Owner unassigned
Contested
Terra appears elsewhere in this curriculum for different mechanisms: F102 for counterparty exposure, S202 for token design, S205 for falsifiers, S207 for sizing and S208 for the disposition effect. This lesson uses only the liquidity pool composition, which none of those cover, and does not re-derive the collapse.
Exact pool shares varied by pool, by hour and by data source through May 2022. The figure used is the reported peak share in the 4pool and the argument does not depend on its precision, because the mechanism produces the direction regardless of the level.