The only model of a DeFi liquidity pool holds two tokens in a sensible contract to kind a buying and selling pair. Let’s use Ether (ETH)
The only model of a DeFi liquidity pool holds two tokens in a sensible contract to kind a buying and selling pair.
Let’s use Ether (ETH) and USD Coin (USDC) for instance, and to make it easy, the worth of ETH might be equal to 1,000 USDC. Liquidity suppliers contribute an equal worth of ETH and USDC to the pool, so somebody depositing 1 ETH must match it with 1,000 USDC.
The liquidity within the pool signifies that when somebody desires to commerce ETH for USDC, they will accomplish that based mostly on the funds deposited, reasonably than ready for a counterparty to come back alongside to match their commerce.
Liquidity suppliers are incentivized for his or her contribution with rewards. Once they make a deposit, they obtain a brand new token representing their stake, referred to as a pool token. On this instance, the pool token can be USDCETH.
The share of buying and selling charges paid by customers who use the pool to swap tokens is distributed mechanically to all liquidity suppliers proportionate to their stake dimension. So if the buying and selling charges for the USDC-ETH pool are 0.3% and a liquidity supplier has contributed 10% of the pool, they’re entitled to 10% of 0.3% of the entire worth of all trades.
When a consumer desires to withdraw their stake within the liquidity pool, they burn their pool tokens and might withdraw their stake.