Liquidity Pools
A liquidity pool is a collection of cryptocurrencies or tokens locked in an exchange to enable trading. Instead of matching buyers and sellers, it uses automated market maker (AMM) algorithms for automatic, seamless trades. Users provide liquidity to earn a share of trading fees, solving the issue of low market liquidity.
What is a liquidity pool?
A liquidity pool is a collection of cryptocurrencies or tokens locked in an exchange to enable trading. Instead of matching buyers and sellers, it uses automated market maker (AMM) algorithms for automatic, seamless trades. Users provide liquidity to earn a share of trading fees, solving the issue of low market liquidity.
What is slippage?
Slippage is the difference between a trade’s expected price and its actual executed price. It often occurs during high volatility or with large orders when there’s not enough volume to maintain the price. Trades with over 0.5% price deviation are rejected to protect users.
How does the liquidity pool work?
Liquidity pools incentivize users to stake assets by sharing trading fees. Providers earn fees based on their share of the pool’s liquidity. For example, NonKYC charges a 0.2% trade fee, fully distributed to pool stakers. Users can withdraw their liquidity and earned fees anytime.
AMMs, like the constant product formula (a * b = c), ensure fair token prices by adjusting ratios as trades occur. For instance, a pool with 100,000 XYZ tokens and 1,000 ETH has a constant product of 100,000,000, setting the price at 100 XYZ per ETH. Prices adjust based on demand and available liquidity.
NonKYC vs. DEX Pools (e.g., Uniswap, Pancakeswap)
NonKYC is a centralized exchange, using a backend engine for swaps instead of on-chain contracts. This allows any listed asset to be used in a pool without blockchain fees for adding/removing liquidity or trading. NonKYC’s 0.2% trade fee goes entirely to liquidity providers, unlike decentralized exchanges (DEXs) that rely on specific blockchains and charge network fees.