Class rule for liquidity pools

Ketju does not approve this kind of structure, whatever the protocol’s quality, and makes no finding against the protocol itself. A class rule never chooses a client position or amount.

Scope

Positions that supply two or more assets to an automated market maker. The rule covers concentrated-liquidity and managed-liquidity pools in which the client keeps the inventory and price-range risk.

The rule

Ketju does not approve a position whose return depends on trading fees making up for the losses the pool takes as it rebalances the client’s inventory. Good protocol quality, audited code or a high advertised APY does not remove that exposure.

When the rule applies

• The client supplies more than one asset, or a strategy recreates the inventory exposure of a liquidity pool.
• Net return depends on swap fees, incentives, range management, or rebalancing as relative prices move.

Research

How it works

A constant-product or concentrated-liquidity pool sells the asset that is rising and buys the asset that is falling as their relative prices move. The position earns fees only when trades pass through it. Concentrated liquidity adds a chosen price range. Outside that range, the position can turn entirely into one asset and stop earning fees. The client therefore bears the risk of volatility, trading flow, range choice and token quality, and receives no contractual interest rate.

Who controls it

Pool factories and core contracts may be immutable or tightly governed. Token issuers, hooks, gauges, routers, position managers and emergency controls can still fail on their own. Better governance lowers operating risk, but the pool still sells the rising asset and buys the falling one as prices move, and that loss is the reason for the rule.

Losses and incidents

Holders can lose money without any exploit. A pool that works as designed can return less than simply holding the two assets when their relative price moves. Small pools can advertise very high APY because the deposits behind the figure are small. Ketju would assess exploit and token-failure history in a separate review only if the rule changed.

Withdrawals

To withdraw, a liquidity provider must burn or transfer the position and accept the asset mix and price the pool offers at that moment. Thin pools, narrow ranges, volatile tokens or many holders leaving at once can cause slippage and leave the client holding the asset that fell. TVL does not measure how much a holder can withdraw at a given price.

Comparison

Single-asset lending or staking keeps the principal exposure clear and separates the venue’s yield from a two-asset market-making strategy. For the client positions Ketju reviews, the simpler structure and a withdrawal that is easier to explain outweigh the chance of extra trading fees.

Review triggers

• A client mandate explicitly authorizes market making and sets limits on losses, price ranges, tokens and withdrawals for that strategy.
• A single-asset design demonstrates that the client bears no impermanent loss and no inventory loss from rebalancing.

Sources

Each source shows its type, the date Ketju accessed it, and the claims it supports. “Primary” means first-hand or governing material; it does not mean that Ketju verified the source independently.

• Uniswap v2 Core whitepaper · primary · accessed 2026-08-14
  Supports: mechanism, inventory loss, fees
• Uniswap v3 Core whitepaper · primary · accessed 2026-08-14
  Supports: concentrated liquidity, range risk
• Curve StableSwap whitepaper · primary · accessed 2026-08-14
  Supports: AMM design, liquidity

Memos under this rule

Each memo listed applies this version of the rule. The depth of research on each protocol varies by memo; where a memo has named sources and fuller research, the memo shows them.