Liquidity Pool Reserve Ratios

Liquidity pool reserve ratios define the relative quantities of the two assets held within an Automated Market Maker pool. These ratios are the primary drivers of the asset price within the pool, as they determine the current exchange rate.

When traders swap assets, they change these ratios, which in turn moves the price along the constant product curve. Monitoring these ratios is vital for arbitrageurs who look for discrepancies between the pool's internal price and the broader market price.

If the ratio in the pool deviates from the external market, it creates an opportunity for arbitrageurs to restore the balance, ensuring that the AMM price remains aligned with global market prices. The ratio is essentially a reflection of the market's consensus on the relative value of the two assets at any given moment.