Liquidity pools

How does a liquidity pool work?

Netswap charges 0.3% fee for all trades, of which 0.25% is added to the liquidity pool of the token pair that was traded on.

A liquidity pool (LP) is a pool of two tokens, e.g. Metis and NETT tokens. This pool is what allows users to exchange between the two tokens automatically.

Users can earn a share of the trading fees by depositing a pair of tokens into the LP (also known as "adding liquidity"). Users will receive an LP token, representing their share of the LP.

Pool APR

Pool APR is the yield you accrue by adding liquidity to a Pool. You earn 0.25% of all trades on this pair proportional to your share of the pool. Fees are added to the pool, accrue in real-time, and can be claimed when you withdraw your Liquidity.

Your share of the Trading Fees will be accrued in real-time and will be paid on top of your existing position when you exit the liquidity pool

Providing liquidity is not without risk, as you may be exposed to impermanent loss (IL).

“Simply put, impermanent loss is the difference between holding tokens in an AMM and holding them in your wallet.” - Nate Hindman

If the prices of the two tokens revert back to the same prices when you added liquidity, you won't suffer any IL.

Tutorial: How to add liquidity to a pool?

  1. Grab your tokens and head to the Pool page

  2. Find the desired pool by using the page filters and/or typing in the tokens you wish to deposit, eg 'NETT' or 'Metis'.

3. Once you have selected the correct pool, you will see the Pool page.

4. Here, you can add tokens and also amend slippage if necessary.

5. Once you add in tokens, you'll have to approve in your Metamask + then deposit the tokens.

6. Done, you are now earning your share of trading fees generated by the pool!

In return for depositing tokens to a tool, you will receive a 'NLP Token' you might be able to use this token in one of our farms to earn extra yield (on top of the trading fees) in the form of $NETT Tokens.

Impermanent Loss (IL)

Providing liquidity to a pool, does come with the risk of impermanent loss.

So what is Impermanent Loss?

Impermanent Loss occurs when the price ratio of the supplied token pair changes. As a simple rule, the more volatile the assets are in the pool, the more likely it is that you can be exposed to impermanent loss. As the AMM dictates that the total liquidity must remain the same, the ratio is readjusted in order to establish an equilibrium.

The 'impermanent' part of IL is an apt description, as the value of the token may yet return to its initial price if it is left in the pool. If the price realigns, then the IL no longer exists, however, if the investor withdraws their funds from the liquidity pool, then the loss is realized fully.

  • Impermanent loss is caused by a bidirectional change in value of either one or both tokens within a pair.

  • The more volatile the underlying tokens are in the pool, the more likely you are to experience Impermanent Loss

  • Impermanent Loss is not permanent and is only realized when you withdraw from a Liquidity Pool.

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