BSC Liquidity Pools
** PLEASE NOTE THIS INFORMATION IS NO LONGER VALID **
Liquidity pools are an essential part of automated market makers (AMM), borrow-lend protocols, yield farming, synthetic assets, on-chain insurance, blockchain gaming and more.
At Charge DeFi we have the following liquidity pools on BSC:
- $Static-BUSD LP
- $Charge-BUSD LP
Liquidity Pool (LP) tokens are a way to provide liquidity. You pair 2 tokens, where the value of both assets inside the LP is balanced 50/50. As the individual prices of the tokens go up/down due to the price actions, the LP will automatically adjust the quantity of both assets to maintain this 50/50 balance.
A simplified example:
- You start with two tokens: A and B
- Token A=$5, Token B=$10
- You create a liquidity pair (LP token)
- A-B LP= (2A=$10) & (B=$10)
- The price of token B goes down to 8$, so now you have (10$ and 8$)
- Token A is traded for token B to keep both sides in equal balance
- You now have a LP with: $9 and $9 = $18 - Inside the LP, that's 1 token B and 1.8 token A
This is highly simplified. In reality EVERY price movement will rebalance the LP token. And buying token B will increase the price of that as well. This price movement also works the other way around. When one of the tokens gains value, it's swapped for the one that didn't gain value.
If you understand this mechanism you also understand that LP tokens function a bit like a brake. Price moves up slower, price moves down slower. It stabilizes the liquidity.
Please also be familiar with the concept of Impermanent Loss at it relates to Liquidity Pool tokens.
Last modified 1yr ago