Curriculum·J303 Liquidity Provision and Impermanent Loss·about 31 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 most liquid decentralized exchange market for Terra's UST. At 21:44 GMT on 7 May 2022 Terraform Labs withdrew $150M of UST liquidity from the UST and 3CRV pool, which left the pool balanced but much smaller. Large UST sales followed, and within the hour the pool was severely imbalanced. As the peg failed, traders kept selling UST into the pools and withdrawing the other stablecoins, and by 18 May a Curve newsletter described the UST pool as 99.3 percent imbalanced, with nearly 130M UST against less than 1M of good liquidity. Liquidity providers who remained were left holding overwhelmingly UST. The imbalance was visible as it happened, 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://jumpcrypto.com/resources/the-depegging-of-ust
- 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/
- https://curve.substack.com/p/may-18-2022-ready-willing-and-stable
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. Jump Crypto's account of 7 May describes the imbalance without a percentage; the figure used is a Curve newsletter's of 18 May, 99.3 percent imbalanced with nearly 130M UST against less than 1M of other stablecoins, which is a late snapshot rather than a peak on any stated date; the newsletter's words are less than 1MM in good liquidity. Jump calls the Curve pool the most liquid market for UST on any decentralized exchange, with Binance's UST and USDT pair the most liquid centralized one. The argument does not depend on the precision of any figure, because the mechanism produces the direction regardless of the level.