What are the risks when providing liquidity?#
It is important to be aware of the risks before providing liquidity. One of the most well-known risks is impermanent loss, but others include market volatility, out-of-range positions, smart-contract vulnerabilities, and untrusted or unverified token teams. Any of these can affect a liquidity provider's position and potentially cause a loss of funds.
Impermanent loss (IL): This occurs when the price of the tokens in a liquidity pool diverges significantly from their price on other markets. Over time the difference can become significant, and it becomes realized when the position is withdrawn. Read more in What is impermanent loss?
Market volatility: Changes in the prices of the tokens in a pool can change the value of a provider's position.
Out of range: When a CenturionDEX v3 position is out of range, it stops earning fees. Providers must manage the position's range, keeping the network cost of each adjustment in mind.
Smart-contract vulnerabilities: Liquidity pools run on smart contracts, which can be susceptible to bugs or exploits that may result in lost funds.
Locked liquidity and rug pulls: The Centurion Protocol is permissionless and decentralized. No central authority controls who can use it, so anyone can swap, provide liquidity, or create new markets. Because of this, research the token and its creators (the "token team") thoroughly. For example, if the token team is the primary liquidity provider, check whether their liquidity is locked. If it is not, the team can remove that liquidity at any time.
Other risks: Liquidity risk can also arise from poor position management, network costs, or thin funding. Set up your position based on your own risk-versus-reward tolerance, and keep in mind the network costs of adding, managing, and removing liquidity.