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How Liquidity Pools Works and Earn: Explained

How Liquidity Pools Works and Earn: Explained. How Liquidity Provider is rewarded. What to know about Liquidity Pools and Liquidity Earning.

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How Liquidity Pools Works

How Liquidity Pools Works and Earn

Most DEXs charge a flat fee on every swap.

For example, Uniswap on Ethereum and Quipuswap on Tezos both charge a flat 0.3% fee on each swap. The fee is indirectly distributed to all liquidity providers (LPs) by increasing the value of the pool, such that when the LP exits the pool, their position is worth more.

Let’s say I start my own DEX called FxkinfinSwap🍻 I create a liquidity pool for trading between Fxkinfin and BTC. Let’s also imagine I’m the only one that can add or remove liquidity, and I charge a swap fee of 0.3%.

How Liquidity Pools Works

I start with $1k of each Fxkinfin and BTC. Then we have Dimcoin come along. He wants to get some Fxkinfin, so he swaps $100 of BTC into the pool. The swap fee is 0.3%, so in return he receives $99,97 worth of Fxkinfin (ignoring slippage). The pool now has $1100 of BTC and $900.3 of Fxkinfin. And we just made $0.30!

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But it’s never THAT easy to make money by providing liquidity.

Have you guys heard of impermanent loss? Or maybe some of you have lost your deposits from it?

I hope this content was helpful and great live a comment and share.

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Ejikeme Agbo is the founder and Partner at Fxkinfin Financial Advocates, owners of fxkinfin.com. He is a financial writer with extensive experience in print as well as online media.

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