Weighted Pools

What are Weighted Pools?

Meridian's Weighted Pools operate by enforcing a Constant Weighted Product invariant for token swaps. A subset of these, known as liquidity bootstrapping pools, caters to auction-like mechanisms. These pools employ Weighted Math, making them versatile for a wide array of applications, including asset pairings without price correlation (e.g., ETH-USDC).

Property	Weighted
Max Tokens in Pool	4
Default Swap Fee	0.15%
Oracle Usage	None

Unlike conventional x*y=k pools which are limited to 2 tokens of equivalent weights (50/50) , Meridian's weighted pools offer flexibility in token counts and proportions. Users can create pools with different weightings such as 80/20 or 60/20/20, among others. Available pairs are dictated by the standard combination formula below:

$nC2 = \frac {n!}{2!(n-2)!}$

Meridian supports weighted pools with up to 4 total assets. As each asset within a pool can be traded against any other, the number of available swaps grows exponentially - reaching up to * pairs for pools with the maximum number of _ tokens. This proliferation of swap pairs naturally encourages increased trading activity, thereby boosting fee collection and distribution to liquidity providers.

Impermanent Loss

Weighted pools offer flexibility in how assets are weighted against each other, allowing liquidity providers to adjust the proportion of each token in the pool. As the token weight increases in favor of one asset, it significantly reduces the unrealized impermanent loss. For example, Impermanent loss decreases in a two-token pool as the asset weight changes, relative to price fluctuations between the tokens.

However, while weighted pools help minimize impermanent loss, they also introduce trade-offs in terms of price slippage. In pools where one token is heavily weighted, swaps experience higher slippage due to the reduced liquidity of the less weighted asset. To balance the reduction in impermanent loss with adequate liquidity, an 80/20 weighting ratio is commonly recommended.