Understanding Your Risks as a Liquidity Provider on Saros DLMM

Understanding Your Risks as a Liquidity Provider on Saros DLMM

Providing liquidity in DeFi opens the door to earning trading fees and incentives — but like any financial strategy, it also comes with risks.

At Saros, we want to help you make informed decisions. This guide breaks down the main risks you should understand before depositing liquidity into Saros DLMM pools.

1. Impermanent Loss (IL)

Impermanent loss occurs when the market price of the tokens in your pool moves away from your entry price. If you withdraw your liquidity after a major price shift, the value of your assets may be less than if you just held them.

• It’s called “impermanent” because it only becomes real if you withdraw while prices are still misaligned.

• IL can be minimized (or even reversed) if prices return to your original range — or if fees earned compensate for the divergence.

Bin-based liquidity allows you to target specific price zones, which can help reduce exposure to IL — but it doesn't eliminate it completely.

2. Out-of-Range Liquidity

If the market moves outside the price range where your liquidity is placed, your position becomes inactive and stops earning fees.

You’ll need to:

• Wait for the price to come back into range, or

• Reposition your liquidity to the new active price bins

This creates a balance between passive vs. active management — tighter ranges earn more but need more maintenance.

3. Price Volatility

DeFi markets can move fast, and tokens can be highly volatile. While this can increase trading volume (and fees), it also increases exposure to:

• Impermanent loss

• Sudden market swings

• Pool imbalance

As an LP, you're indirectly taking on price exposure, especially if you're concentrated in a small range or single-sided.

4. Smart Contract Risk

Saros DLMM is a smart contract system. While it's designed for security and efficiency, no smart contract is risk-free.

Potential risks include:

• Bugs in the contract code

• Exploits or vulnerabilities

• Integration errors with third-party platforms

Always ensure you’re using verified contracts and official interfaces (like Saros’ dApp), and keep your wallet software updated.

5. Protocol-Level Risks

Even if the contracts are safe, risks may arise at the protocol level:

• Misconfigured incentives

• Governance attacks

• Liquidity migration events

• Dependency risks (e.g., price oracles, bridges)

These can affect how rewards are distributed or how pools behave, especially in turbulent market conditions.

6. Regulatory Uncertainty

While DeFi is global and open, regulatory changes in your country (or globally) may impact your ability to participate or affect how protocols operate in the future.

Stay informed and aware of local legal frameworks — especially when dealing with real-world assets or stablecoins.

7. Operational Risk

Sometimes, simple user-side errors can cause problems:

• Depositing into the wrong pool or range

• Mistiming entry during high volatility

• Forgetting to manage or withdraw liquidity

We recommend all users review their positions regularly and use Saros’ UI features like My Positions, Real-Time Rewards, and Limit Orders for better control.

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What is Divergence Loss (Impermanent Loss)?

Impermanent loss happens when the price of tokens in a liquidity pool moves away from the point where you deposited liquidity. It’s “impermanent” because the loss is only realized when you withdraw — but with concentrated liquidity (like on Saros), the impact can be more noticeable if you're tightly positioned.

Setup:

Let’s say:

• Token A = $100

• Token B = $1

• You provide $1000 in liquidity as 5 Token A + 500 Token B

• Your liquidity is placed in a tight range (e.g., $99.9 to $100.1)

Scenario 1: Price of Token A increases to $200 (Token B stays $1)

Strategy	Token A	Token B	Total Value	Impermanent Loss
Holding	5	500	$1500	0%
Saros AMM	3.54	707.11	$1414.21	5.7%
Saros DLMM	0	1000	$1000	33.3%

Because you were in a concentrated range and didn’t adjust, all of your Token A got swapped into Token B before the price pumped → lower ending value.

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Scenario 2: Price of Token A drops to $50 (Token B stays $1)

Strategy	Token A	Token B	Total Value	Impermanent Loss
Holding	5	500	$750	0%
Saros AMM	7.07	353.55	$707.11	5.7%
Saros DLMM	10	0	$500	33.3%

This time, your entire position got swapped into Token A as the price dropped. If you withdraw now, you lock in a lower value than if you had simply held both tokens.

Key Takeaways

• Concentrated Liquidity = Higher Risk, Higher Reward You can earn more fees, but you’re also more exposed to price divergence;

• Wider ranges reduce divergence loss, but they may earn fewer fees;

• Active LPs should monitor positions and rebalance when the price leaves the active range.