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Author: Admin | 2025-04-28
Depositing an equal value of two tokens (e.g., ETH and USDT) into a pool. In return for supplying liquidity, providers earn a share of the trading fees that occur in the pool.Automated Market Makers (AMMs): Instead of relying on buyers and sellers directly, AMMs use smart contracts to facilitate trades. When a trade occurs, the pool automatically adjusts the price based on a formula, often referred to as the constant product formula:x∗y=kx * y = kx∗y=k,where x and y represent the quantities of the two assets, and k is a constant value that should remain unchanged.Price Impact and Slippage: When a large trade is made in a relatively small pool, it can cause a significant shift in the ratio of tokens, leading to price slippage. This is why larger liquidity pools tend to have smaller slippage and can handle bigger trades more efficiently.Incentives: Liquidity providers are incentivized through trading fees (usually a small percentage of each trade) and potentially additional rewards from DeFi platforms in the form of native tokens, encouraging more users to provide liquidity.Liquidity Pool Tokens (LPTs)Liquidity Pool Tokens (LPTs) are tokens issued to liquidity providers in exchange for their contributions to a liquidity pool representing their share of the pool. These tokens represent a proportional share of the pool and act as a receipt of the user’s deposited assets. LPTs are unique to each pool and allow users to reclaim their initial assets at any time, alongside any accrued trading fees.LPTs can be seen as a proof of ownership. For example, if you supply liquidity to an ETH/DAI pool on a decentralized exchange, you will receive an equivalent amount of ETH-DAI LPTs, which you can later use to redeem your share of the pool. The value of these tokens increases as trading occurs and fees accumulate.Trading fees generated by the pool are then distributed among Liquidity Providers based on the share of Liquidity Pool Tokens they hold. The participants can also stake or trade the LPTs, allowing them to further capitalize on their liquidity provision.Crypto users often get confused between Liquid Staking Derivatives (LSDs) and Liquidity Pool Tokens (LPTs). LSDs are a representation of your staked asset on a proof of stake blockchain. On the contrary, LPTs are a virtual representation of your tokens deposited into a liquidity poolEarning from Liquidity PoolsLiquidity Pools offer a great opportunity for investors and traders to earn an Annual Percentage Yield
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