I did months of research on liquidity pools and after doing so, I jumped into the Osmosis dex to try it out. Let me explain on pools work, in the fine print, that no one explains or tells you.....
Let's pretend that there is a token coin called S. S is being traded on the Osmosis network for $0.10 cents each. You want to provide Osmo to the pool and buy in, by trading half of your Osmo to S. So, you give in with $100, $50 of S and $50 of Osmo. What all sites and articles tell you, is that when people trade using S, you get a % of each swap, in that token. So if the pool had a 10%apr, you would get ((10/100)/365*50) in S tokens, each day. If that token is doing well, then you can make a good amount.
What these sites don't tell you, and what Osmosis doesn't tell you in any FAQ or anywhere on the site, is that through a procedure called "Re-Balancing", if the value of that token goes down, the DEX takes some of the OSMO to exchange into that token. For example: let's say that the value of S starts to go down. People online will still use the swap, but now the website uses your Collateral of Osmo, in their swaps. This means that if the value of S goes down to 1 cents, the amount of your Osmo will trickle down to almost nothing as well. So the S token goes down in value and people want to get rid of it, exchanging it for OSMO and in doing so, since there is only so much of the OSMO in that pool, it starts to decrease your APR and rewards for that pool. As the value of the S token goes down, it removes that value from your bonded value amount and since it will now start to pull the OSMO out, your bonded value goes down even more.
This doesn't work in the opposite though. So, if the value of S sky-rockets, your quantity of Osmo doesn't go up either.
While this makes sense when you think of it this way in their business model, it means that if you pooled your $50 of Osmo and the S token tanks to 0 or worthless, you lose all of your Osmo as well!
As a business model, it supports the business and not the investor in any way. When people put their money into a bank, in a Savings account, the bank uses their money, for their own investments. When a bank goes broke, like the silicon Valley bank did, they used the savings of their users as investment and then when the investments failed, the users lost their money.
This makes Osmo dex acting like a bank. If you invest in a pool with a token that goes from 1-0, then that means your Osmo will also go from 1-0 quantity, meaning you lose all of your money.
It would make more sense as a business model, to say that when a pool loses all of that token added in, then it slows down the swapping or stops that swap. What I mean is this: I bought into a scam. I bought in for a token called Summitt, and paid over $740 USD into the pool. I also had half of that as about 462 OSMO into this pool. The coin went and died to $0.00. Instead of me just losing the value of that coin, which I had 26,000 of and would have been about $375 wiped out, the pool ended up taking all of my OSMO as well. Somehow, the scammers were able to trade in all of their own crypto token, and get all of the osmo that was in the pool. Which then meant that the Osmosis dex website used the Osmosis that was in the pool. This meant that people like me, who invested into the pool, lost it all.
Am I upset that I lost money to a rug-pull scam? Yes.
Am I upset that that the "rebalance" method was not explained anywhere on the website to explain that if I am a victim of a Rug-pull scam I would lose all of my Osmo in the pool as well? Also, yes.
Am I upset that within the voting cycle of the OSMO coin, there was an option on the table for when new token pools were created, the new pool creator had to pay some amount, to prevent this scam from happening and then this was voted with a "NO"; meaning that token creators could create pools of huge amounts of rewards, only then to pool away and scam everyone without any penalty or loss to them? Yes.
What does this mean for me? Well, I am forced to sell off some of my other crypto, to make up for the loss of the scam token and the Osmo. This in turn means that my initial investment is all gone. I jumped in, hoping to not get rich, but help pay for some bills, using crypto turned into gift cards. With me losing all of that, I am stuck back to my initial deposit into the OSMO de, which is about $50usd.
