Mdex liquidity pools and price divergence in LP value

Establish the position and its comparison baseline

A meaningful LP comparison starts with the exact pair, the contributed amounts, and a valuation time. Without that baseline, a changing wallet value cannot be separated into market movement, pool rebalancing, fees, rewards, or network costs.

First verify that the selected network is active. Mdex's November 20, 2024 announcement said HECO would go offline on January 15, 2025. Then identify both assets by contract address on that network. Symbols can be copied, while contract addresses define the assets held by the pair. The pair contract, current reserves, LP token supply, and the account's LP balance together establish the account's proportional claim.

An addition to an existing pool follows its current reserve ratio. The routing contract calculates the matching amount of the second asset and does not treat any unused desired amount as liquidity. A newly created pair differs because its first provider sets the initial ratio, which can attract arbitrage if it departs from the wider market.

• Record the pair contract and selected network.
• Record both token contracts and contributed quantities.
• Use consistent external prices at the deposit and comparison times.
• Keep the LP token balance and total supply needed to derive the share.
• Separate network costs, pool fees, and any incentive rewards.

Token approvals and liquidity provision can be separate transactions, each with its own network cost. A successful addition mints LP tokens to the specified recipient. If those tokens are later deposited into an incentive contract, the wallet balance alone no longer shows where the claim is held.

Completion is visible in a successful transaction receipt, the pair's reserve update, and the credited LP tokens. Saving the contributed quantities and their value at that point creates the comparison baseline. A later valuation can then use the same unit of account instead of treating a rising dollar balance as proof that liquidity provision outperformed holding.

Reserve changes rewrite the token mix

Every swap shifts the two reserves, and an LP owns the same fraction of that changing inventory until the share changes. Buying one asset from the pool reduces its reserve and adds more of the other asset. Arbitrage trades tend to move the reserve ratio toward external prices, subject to fees and execution costs.

Mdex's automated market maker keeps each pair on a constant-product curve, expressed as x multiplied by y equals k when fees are set aside. The invariant does not preserve the quantity of either asset. It constrains their product, so a lower reserve of one asset corresponds to a higher reserve of the other.

The position amounts can be estimated by multiplying each pool reserve by the LP's share of total LP supply. That calculation explains why an unchanged LP token count can represent different asset quantities. When other providers add or remove liquidity, total reserves and LP supply change together, while swaps change the reserve composition available to every share.

Why can an LP position trail simple holding?

The shortfall appears when the relative price changes because the pool continuously exchanges part of the stronger asset for the weaker one. A holder keeps the original quantities. An LP instead ends with the pool's rebalanced quantities, plus the position's share of accrued fees and any separately earned rewards.

For a constant-product pair with equal starting values and no fees, the LP-to-hold value ratio is 2 x sqrt(r) / (1 + r), where r is the ending relative price divided by the starting relative price. The ratio is below one whenever r differs from one. Reciprocal moves, represented by r and 1/r, produce the same percentage shortfall.

“Impermanent” does not mean that the shortfall is trivial or certain to reverse. In the simplified model, the divergence component narrows if the relative price returns toward its starting ratio before withdrawal. Fees may offset some or all of it, but a withdrawal fixes the asset quantities received for the portion removed.

Fees and incentives belong in separate columns

Fee income can close the gap with holding, but its size depends on trading activity, the position's pool share, and the applicable pair configuration. Read the relevant fee input from the live factory configuration for that pair; a historical headline percentage is not a safe substitute. Incentive rewards require an eligible program and, where applicable, a separate LP-token deposit. Value each component at the same comparison time and subtract every transaction cost used to enter, manage, or exit the position.

View full-size image

Withdrawal converts the share into current reserves

The exit amount depends on the LP share and the reserves available when the removal executes, not the two quantities originally deposited. Minimum-amount fields set the least acceptable output for each asset. A transaction reverts rather than completing below those limits, although the failed call can still consume network gas.

Removing liquidity burns the submitted LP tokens and returns the corresponding amounts of both reserve assets, subject to the transaction's minimum-amount conditions. If the LP token sits in a separate staking contract, it must first return to the account that can authorize removal. Pending rewards and pool reserves are different balances, so they should not be merged before each has actually reached the wallet.

After confirmation, reconcile four records: the burned LP amount, both token transfers, the receipt's gas cost, and any reward withdrawal made separately. A token with unusual transfer behavior can make wallet-level changes differ from a simple reserve-share estimate. The final comparison therefore uses received balances, not only the interface preview.

Separate holding offers the cleaner exposure

Holding the two assets separately preserves their original quantities and avoids automatic selling of the relative winner, but it earns no pool fee share. Liquidity provision accepts changing quantities in exchange for fee exposure and possible eligible incentives. The relevant choice is whether those variable earnings justify rebalancing risk, contract exposure, transaction costs, and the operational work of tracking the LP claim.