💰Liquidity pool
Liquidity Pool in Dywe
A Liquidity Pool is a liquidity provision mechanism on decentralised exchanges (DEX) that allows users to exchange assets without the involvement of traditional market makers. On Dywe, users can deposit funds into the Liquidity Pool and receive remuneration for providing liquidity in the form of commission payments.
1. Basic principles of liquidity pool
1.1 Creating a liquidity pool
A liquidity pool is created by depositing tokens into a smart contract.
The user depositing assets into the pool is recognised as a Liquidity Provider (DLP).
1.2 Liquidity tokens (DLP tokens)
In exchange for deposited assets, the liquidity provider receives DLP tokens that represent its share in the pool.
DLP tokens can be used to withdraw liquidity from the pool.
The provider's share in the pool varies depending on its contribution and the dynamics of the liquidity volume.
1.3 Adding and removing liquidity
Adding liquidity: When new assets are deposited into the pool, the total amount of liquidity is increased and the provider receives DLP tokens according to the amount deposited.
Liquidity withdrawal: When liquidity is withdrawn, DLP tokens are destroyed (burned) and the user receives their share of assets from the pool, subject to fees and potential non-permanent losses.
1.4 Final Asset Value
At the time of liquidity withdrawal, the final asset value is fixed based on the current state of the pool.
The liquidity provider can either make a profit or record a loss based on the current state of the market and accumulated commissions.
2. Remuneration for liquidity providers
Liquidity providers receive a portion of the commissions accrued on the Dywe platform. The distribution of funds to liquidity providers is as follows:
80% of the service commissions (Fees).
70% of the Funding mechanism payments.
80% of Negative P&L (Negative P&L).
70% of commissions for position rollover (Rollover).
The amount of remuneration depends on the provider's share in the liquidity pool.
3. Risks and compensation mechanisms
3.1 Impermanent Loss
Impermanent losses occur if the price of the assets in the pool changes relative to the time of deposit. This is because the ratio of assets in the pool is adjusted to balance liquidity.
Factors affecting non-permanent losses:
Significant changes in the price of assets held in the pool.
Prolonged holding of liquidity in the pool when market volatility is high.
Compensation mechanisms:
Non-permanent losses can be compensated if the asset price returns to its original level.
Fees from transactions on the platform partially or fully cover potential losses.
3.2 Dynamic liquidity allocation
New deposits change the structure of the pool and redistribute the shares of existing participants.
If the liquidity level in the pool is low, there may be an increase in spreads and slippages in the execution of trades.
4. The role of the liquidity pool in Dywe
The liquidity pool acts as an automated market maker (AMM), providing users with access to liquidity without the need for an order book.
Key features:
Automated trade execution - users can trade using pool liquidity without counterparties.
Decentralised liquidity provision - there are no centralised market makers, liquidity is provided by the community.
Flexible asset management - users can add and remove liquidity at any time.
The liquidity pool on DEX acts as a counterparty in the transaction, allowing users to exchange tokens directly through a smart contract without having to rely on traditional buy and sell orders. This system enables decentralisation and seamless access to liquidity, making blockchain trading more accessible and democratic.
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