liquidity pool question

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liquidity pool question

hey everyone, I googled this first but didn't find the answer, hoping you all can help me expand my understanding!

I've been looking into liquidity pools and I understand the basics. you tie two currencies together (say UST+ETH) at a 50/50 ratio, to help facilitate trades, and are paid rewards to do it. As I understand it, there is automatic balancing done, so if one side's value drops, the other side increases to compensate and keep the pool stable (correct me if I'm wrong here)

my question is, what happens if someone is only trading on one side (UST>ETH) but not the other way, how does that affect the pool? as I understand it, my pool is what is facilitating these trades, so if the pool then balanced the extra UST back to ETH, what is facilitating that trade? other liquidity pools? if so, how does this not then create an automated spiral within similar pools?

in addition if there is balancing done to counteract price fluctuations, what causes the collateral value of a pool to drop? I put a little into one and noticed that the collateral value dropped over the last week, and I'm unsure what would cause this if my understanding of the balancing mechanic is true.

*edit* so my perception was wrong, lets say I add 1eth+$3000UST into a pool, then while I may be able to look at my dashboard and see that I contributed that, moving forward my LP token is not for 1eth+$3000ust, it's for whatever percentage of the pool I'm contributing to. between when I create and burn the token, trades will be made and if there is a large amount of trades one way or the other, the total balance of the pool could shift, say to 25% eth and 75% UST (using an extreme example). if I then burn my LP token, I will get whatever percentage I contributed to the pool in the current ratio, so if (hypothetically) the total pool hadn't changed, when I burn the token I would get .25eth and 5,250UST (resulting in potential impermanent loss if ETH went up in value in that time, but getting a… impermanent gain? if eth dropped in that time)

this is ignoring any LP rewards or commissions added to the pool in that time to increase the value

submitted by /u/attredies
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