Liquidity pools

Liquidity pools

“DeFi” stands for decentralized finance; specifically, non-custodial borrowing & lending platforms, decentralized exchanges (DEX), synthetic assets and derivatives protocols. But the most popular kind of DeFi is liquidity pools.

The Pools tab in Minter Console: https://console.minter.network/pool.

Liquidity pool fees

  • Create a pool: 500 BIP
  • Add liquidity: 5 BIP
  • Remove liquidity: 5 BIP
  • Trade within the pool: 1.5 BIP + 0.2%

Liquidity providers are those who add their assets to a pool at pre-determined proportions. Liquidity providers receive rewards in the form of fees, which are charged for every trade (0.2%). The rewards are distributed according to the provider’s share of the pool.

When providing liquidity to pools, however, it is important to remember the definition of impermanent loss.

What is Impermanent Loss?

Impermanent Loss

Impermanent loss means partial loss of profit.

Example

Pool: HUB-USDC

1 HUB = 100 USDC

Bob adds liquidity to the pool: 1 HUB and 100 USDC. The pool’s total liquidity now stands at 10 HUB and 1,000 USDC. That means Bob’s share is 10%.

After some time, during which users have been swapping USDC for HUB within the pool, the price of HUB rose to 400 USDC. Now there’s 5 HUB and 2,000 USDC in the pool.

Bob decides to take his money out. Since his share is 10%, he takes 0.5 HUB and 200 USDC. Translated into dollars, Bob should now have $400, right (0.5 HUB x 400 USDC + 200 USDC)?

But if Bob hadn’t provided liquidity to the pool and simply held 1 HUB and 100 USDC instead, he would’ve had $500 (1 HUB x 400 USDC + 100 USDC). There’s a $100 difference, and that’s called impermanent loss.

Here are the impermanent loss values depending on coin price fluctuation:

  • 25% change (1.25x) = 0.6% loss
  • 50% change (1.5x) = 2%
  • 75% change (1.75x) = 3.8%
  • 100% change (2x) = 5.7%
  • 200% change (3x) = 13.4%
  • 300% change (4x) = 20%
  • 400% change (5x) = 25.5%

Always keep this factor in mind when you’re accounting for the profitability of becoming an LP. This loss can be compensated with fees that the provider receives for supplying liquidity, as well as farming.

Setting up a liquidity pool

The first thing you should do is check if the pool already exists. You can do it at https://explorer.minter.network/pools.

If such a pool doesn’t exist yet, choose a pair of tokens you want to create and give them an initial ratio, then form the initial in-pool price.

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Depending on the ratio, the price is updated in the field below in real time.

Once you’ve figured out all the settings, click Create and confirm the transaction.

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The liquidity pool has been created!

Now you can observe it at the top of the page.

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LP-10 (in this case) is the token that confirms the ownership of a certain share of this pool’s liquidity. 10 is the number of the pool. They’re needed to retrieve your coins from the pool should you want to remove your liquidity.

Next you see the ticker of the pair, the amount of coins in your possession within the pool, the worth of your liquidity, and your share expressed in %.

LP tokens and their amount can be seen on your wallet balance on a separate page.

Adding liquidity to the pool

You can add liquidity to your pool by either pressing the plus sign on the right from the share percentage (if you’ve participated in the pool), or going beneath the pool creation section. To view the list of pools, go to https://explorer.minter.network/pools.

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Enter the coins that are in your pool and specify the amount of either of them. The amount for the other one will be calculated automatically and shown below.

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To add liquidity, press Add and confirm the transaction.

LP tokens and their amounts can be seen on your wallet balance on a separate page.

Removing liquidity from the pool

You can remove liquidity from your pool by pressing the minus sign below the share percentage (if you’ve participated in the pool), or by going beneath the pool creation section.

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Enter the coins in your pool and then specify the share you want to withdraw from the pool. Below you’ll see the amount of coins you’ll receive back, as well as the amount of LP tokens you’ll give in exchange.

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To remove liquidity from the pool, click Remove and confirm the transaction.

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