Single vs. Double-Sided Liquidity: Which is Better?
Compare single-sided and double-sided liquidity in DeFi. Learn the risks, rewards, and best strategies for liquidity providers to maximize returns and minimize impermanent loss.
Feb 21, 2025
Contents
Table of ContentsIntroduction to Liquidity Provision in DeFiWhat is Single-Sided Liquidity?What is Double-Sided Liquidity?Key Differences Between Single-Sided and Double-Sided LiquidityPros & Cons of Single-Sided LiquidityPros & Cons of Double-Sided LiquidityWhen to Choose Single-Sided LiquidityWhen to Choose Double-Sided LiquidityPopular DeFi Platforms Offering Single & Double-Sided LiquidityFinal Verdict: Which is Better?Frequently Asked QuestionsConclusionTable of Contents
- Introduction to Liquidity Provision in DeFi
- What is Single-Sided Liquidity?
- What is Double-Sided Liquidity?
- Key Differences Between Single-Sided and Double-Sided Liquidity
- Pros & Cons of Single-Sided Liquidity
- Pros & Cons of Double-Sided Liquidity
- When to Choose Single-Sided Liquidity
- When to Choose Double-Sided Liquidity
- Popular DeFi Platforms Offering Single & Double-Sided Liquidity
- Final Verdict: Which is Better?
- Frequently Asked Questions
Introduction to Liquidity Provision in DeFi
Liquidity providers (LPs) play a crucial role in decentralized exchanges (DEXs) by supplying assets to automated market makers (AMMs). This ensures smooth trading, reduces slippage, and helps investors earn passive income through trading fees and liquidity mining rewards.
Before deciding between single-sided and double-sided liquidity, it’s important to understand how liquidity pools work. Read our pillar guide on Liquidity Pools: The Smart Way to Earn in DeFi.
What is Single-Sided Liquidity?
Single-sided liquidity allows LPs to deposit only one asset into a liquidity pool rather than a token pair. Key features include:
- Examples: Bancor and Aave’s liquidity staking.
- Impermanent loss mitigation: The protocol often absorbs IL risks.
- Yield generation: LPs earn rewards from protocol incentives.
This approach is particularly beneficial for risk-averse investors.
What is Double-Sided Liquidity?
Double-sided liquidity is the traditional AMM model, requiring LPs to deposit equal values of two tokens into a pool. Key features include:
- Examples: Uniswap, SushiSwap, Curve Finance, and Balancer.
- Trading fees: LPs earn a share of transaction fees.
- Yield farming incentives: LP tokens can be staked for additional APY rewards.
While offering higher returns, this model exposes LPs to impermanent loss risks.
Key Differences Between Single-Sided and Double-Sided Liquidity
Feature | Single-Sided Liquidity | Double-Sided Liquidity |
Capital Efficiency | LPs provide only one asset | Requires equal deposits of two tokens |
Yield Potential | Lower but more stable yields | Higher APYs but with IL risks |
Impermanent Loss Exposure | Reduced or absorbed by protocol | LPs bear the IL risk |
Flexibility & Accessibility | Easier entry for new LPs | Requires understanding market volatility |
For timing liquidity entries, check out our guide on Best Times to Add Liquidity in DeFi.
Pros & Cons of Single-Sided Liquidity
✅ Pros:
- Lower impermanent loss risks
- Easier entry for LPs (no need for token pairing)
- Better for stablecoin pools
❌ Cons:
- Lower trading fee rewards compared to double-sided pools
- Relies on protocol incentives
- Potential centralization risks (if protocol fails, LPs may incur losses)
Pros & Cons of Double-Sided Liquidity
✅ Pros:
- Higher fee earnings
- Deeper liquidity, benefiting traders
- Broader protocol adoption in DeFi
❌ Cons:
- Impermanent loss exposure
- Must hold two assets, increasing market risk
- Volatility can reduce profitability
When to Choose Single-Sided Liquidity
Single-sided liquidity is best for:
- Risk-averse investors who want to avoid impermanent loss.
- Stablecoin liquidity pools where volatility is minimal.
- Protocols offering strong incentives for single-sided staking.
If you’re optimizing yield farming strategies, explore our guide on APY vs. APR in DeFi.
When to Choose Double-Sided Liquidity
Double-sided liquidity is ideal for:
- High-frequency traders and active yield farmers.
- Volatile asset pairs with high trading volume.
- Long-term liquidity mining rewards optimization.
This model suits experienced DeFi investors who can manage impermanent loss risks.
Popular DeFi Platforms Offering Single & Double-Sided Liquidity
Single-Sided Liquidity Platforms:
- Bancor – Offers impermanent loss protection.
- Tokemak – Focuses on liquidity directing.
- Aave – Allows liquidity staking for lending rewards.
Double-Sided Liquidity Platforms:
- Uniswap – Leading Ethereum-based AMM.
- SushiSwap – Offers liquidity mining incentives.
- Curve Finance – Specializes in stablecoin pools.
- Balancer – Supports multi-token pools.
Final Verdict: Which is Better?
The best choice depends on your investment strategy:
- Choose single-sided liquidity if you prioritize low risk and stable returns.
- Choose double-sided liquidity if you’re willing to take on more risk for higher rewards.
As DeFi evolves, hybrid models and concentrated liquidity strategies are emerging, offering more flexibility for LPs.
Frequently Asked Questions
Q1. What is single-sided liquidity in DeFi?
Single-sided liquidity allows LPs to deposit one asset into a liquidity pool, reducing impermanent loss risks.
Q2. What is double-sided liquidity?
Double-sided liquidity requires equal deposits of two tokens, exposing LPs to impermanent loss but offering higher rewards.
Q3. How do I decide between single and double-sided liquidity?
Consider your risk tolerance, investment goals, and DeFi strategy. Single-sided liquidity is less risky, while double-sided liquidity offers higher returns with greater risk.
Q4. Which DeFi protocols support single-sided liquidity?
Platforms like Bancor, Tokemak, and Aave support single-sided liquidity staking.
Q5. How do I mitigate impermanent loss in double-sided liquidity pools?
- Use stablecoin pairs to reduce volatility.
- Add liquidity during stable market conditions.
- Diversify across multiple DeFi protocols.
Conclusion
Choosing between single-sided and double-sided liquidity depends on your risk appetite and yield expectations. While single-sided liquidity minimizes impermanent loss, double-sided liquidity provides higher returns through trading fees and liquidity mining.
For a deeper understanding of liquidity pools, check out our pillar guide on DeFi Liquidity Pools.
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