Risks for liquidity providers

Putting assets in a pool is not the same as holding them. Four things can go wrong.

1. The price moves. A pool does not know outside prices. Say FOO jumps in value elsewhere. For a moment the pool still sells FOO at the old, cheap rate. Traders buy it up until the pool's price catches up. The pool is left with less FOO, the asset that rose, and more XRP.

Your LP tokens now redeem for that new mix. It can be worth less than if you had kept your FOO and XRP in your wallet. This gap is often called impermanent loss. xrpl.org calls it currency risk. If the price returns to where it was, so does the mix. If you withdraw before then, you take the new mix.

2. Fees may not cover it. Trading fees add to the pool, and they can offset the gap. They depend on how much people trade. No rule says they will be enough.

3. The token's issuer has powers. If an issuer freezes a pool token, deposits stop and the LP tokens freeze too. If the issuer enabled clawback, it can pull its token out of the pool from a specific provider.

4. The token may be worthless. Anyone can issue a token and open a pool for it. A pool of XRP and a bad token still takes your XRP. Check the issuer before depositing.

Currency risk. The constant product design keeps the pool's price in line only through trades. XLS-30 states it directly: when the pool's price is out of sync with external markets, arbitrageurs profit at the pool's expense. The auction slot and the trading fee return part of that to providers. Neither sets a floor.

Freezes

• AMMDeposit fails with tecFROZEN if a pooled token is frozen globally, for the sender or for the AMM account. A freeze on one asset blocks deposits of both.
• AMMWithdraw fails with tecFROZEN if the token is globally frozen for the AMM account, or deep frozen for the sender. A regular freeze on the sender alone does not block withdrawal.
• LP tokens of a pool with at least one frozen asset are frozen. They cannot be sent by Payment, sold by OfferCreate, cashed by CheckCash or used to pay in NFT offers.
• amm_info reports asset_frozen and asset2_frozen.

Clawback

• With the AMMClawback amendment, tokens whose issuer enabled Allow Trust Line Clawback can be used in pools.
• The issuer sends AMMClawback with Holder, Asset, Asset2 and an optional Amount. Without Amount, all of the holder's share of that token is clawed back.
• The matching share of the other asset goes back to the holder. With tfClawTwoAssets, both sides are clawed back, and only when the same issuer issued both.
• Clawback must be enabled before the issuer has any trust lines, and it cannot be turned off.

Authorized tokens. If a pool token uses authorized trust lines, an account that is not authorized for it cannot deposit either asset (tecNO_AUTH).

Checks before depositing

1. amm_info for balances, trading_fee and frozen flags.
2. account_info on each token issuer for clawback, freeze and transfer fee settings.
3. The share math: your LP tokens divided by lp_token.value, times each pool balance.

Related: Freeze, Deep Freeze and Clawback, Checking a token.