Liquidity pools experiencing price divergence are considered out of sync.
Price divergence is when a pool’s current price is out of range from other pools for the same token.
Here is an example of an out of sync DAI/ETH pool:
In the image above, the pool has a current price 1 DAI = 0.00022 WETH.
However, the current price in other pools is 1 DAI = 0.00027 WETH. Therefore, the pool with a current price 1 DAI = 0.00022 WETH is out of sync.
Swapping in or adding liquidity to an out of sync pool creates an “arbitrage opportunity”.
An arbitrage opportunity is a strategy that exploits price differences of the same token in different markets or liquidity pools, allowing swappers to profit from temporary market inefficiencies.
An arbitrage opportunity is a strategy where someone takes advantage of price differences for the same token in different liquidity pools to make a profit.
These opportunities are constantly searched for by swappers on the blockchain using an arbitrage bot.
Arbitrage bots:
- Detect price divergence between pools
- Buy tokens from anther pool at the current price
- Sell tokens in the out of sync pool
- Profit from the price difference
Therefore, swapping in or adding liquidity to an out of sync pool may result in a loss for the provider.