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LPs (Liquidity Pools)
In the new Exchange V3, liquidity will be managed in the form of non-fungible positions. You will still earn a share in the fees while providing liquidity.
In V3, liquidity providers now have more control over what price range they want to deploy their liquidity. So, when you add your token to a Liquidity Pool in V3, you will create a new non-fungible liquidity position with its unique settings.
Therefore, in V3, liquidity positions are NFTs. Please note that these NFTs are transferable, and they represent the ownership of the underlying assets and the trading fees they earned.
In V3, trading fees will no longer be automatically compounded in the position. You can manually claim them on each of the position detail pages.
In V3, liquidity providers can configure their positions to only provide liquidity when the price is within a certain range. If the trading price moves out of the range, the position will consist of only one type of token in the pair and become inactive.
Inactive liquidity positions will not participate in trading or earn any trading fees.
In V3, because of liquidity providers can concentrate their token deposits to provide liquidity only within a specific price range. With the same amount of underlying assets, V3 can support a much bigger trade.
It results in a much higher relative liquidity level when compared to V2. And liquidity providers can earn more trading fees with the same amount of capital.
Here is an example:
Chris and Claudia both provided liquidity in BLDT/USDT pool with $1,000 USD worth of token assets. The current price of BLDT is 5 USDT.Similar to BlueLotusDAO v2, Chris provided his liquidity across the entire price range. Therefore he deposited all of his capital, 500 USDT and 100 BLDT.Claudia utilize the new concentrated liquidity feature in BlueLotusDAO v3 and created a position with a price range of 2 to 12.5 USDT per BLDT. She deposited 185 USDT and 37 BLDT, worth a total of $370. She is now able to spend the remaining $630 elsewhere, like locking BLDT in the Blue pool to enjoy high yield while receiving a series of BlueLotusDAO ecosystem benefits.As long as BLDT stays within the price range of 2 to 12.5, both Chris and Claudia will receive the same amount of trading fee rewards while Claudia deposited way less capital to the liquidity pool.
When you add your token to a Liquidity Pool you will receive Liquidity Provider (LP) tokens and share in the fees.
As an example, if you deposited BLDT and GSYS into a Liquidity Pool, you'd receive BLDT -GSYS LP tokens.
The number of LP tokens you receive represents your portion of the BLDT-GSYS Liquidity Pool.
You can also redeem your funds at any time by removing your liquidity.
Providing liquidity gives you a reward in the form of trading fees when people use your liquidity pool.
Whenever someone trades on BlueLotusDAO, the trader pays a 0.25% fee, of which 0.17% is added to the Liquidity Pool of the swap pair they traded on.
- There are 10 LP tokens representing 10 BLDT and 10 Gsys coin.
- 1 LP token = 1 BLDT + 1 GSYS
- Someone trades 10 BLDT for 10 GSYS.
- Someone else trades 10 GSYS for 10 BLDT.
- The BLDT/GSYS liquidity pool now has 10.017 BLDT and 10.017 GSYS.
- Each LP token is now worth 1.00017 BLDT + 1.00017 GSYS.
To make being a liquidity provider even more worth your while, you can also put your LP tokens to work whipping up some fresh yield on the BLDT Farms, while still earning your 0.17% trading fee reward.
Providing liquidity is not without risk, as you may be exposed to impermanent loss.
What is Impermanent Loss:
Impermanent loss refers to a temporary loss of funds that liquidity providers may experience when supplying assets to a liquidity pool in decentralized finance (DeFi) platforms or automated market makers (AMMs) like BlueLotusDAO, Uniswap, SushiSwap, or PancakeSwap.
It occurs when the price of one asset in the liquidity pool changes compared to when the assets were initially deposited. This price change can happen due to market volatility, resulting in a shift in the ratio of the provided assets. As a result, when liquidity providers withdraw their assets, they might receive fewer tokens than they initially deposited, leading to a loss.
The term "impermanent" suggests that this loss is not permanent and can fluctuate depending on the market conditions. If the prices of the assets revert to their original values or move in a way that reduces the divergence, the impermanent loss diminishes or disappears. However, if the prices continue to move in the opposite direction, the impermanent loss can become more significant.
It's important to note that impermanent loss affects liquidity providers but is not a concern for traders or investors who simply hold tokens. It's a risk associated with participating in liquidity provision for decentralized exchanges and automated market makers in DeFi.