Collect trading fees for providing exchange liquidity
Exchange Pool Staking is a significant component of the decentralised exchanges (DEXs) on Unit Network. Users can choose to add tokens to an exchange pool to earn up to 0.5% of every trade.
Here's a brief overview of how liquidity pool staking works in this context:
Liquidity Pools: These are pools of tokens locked in a smart contract used to facilitate trading by automatically determining prices based on a mathematical formula.
Providing Liquidity: Exchange Pool Stakers, also known as liquidity providers (LPs), add an equal value of two tokens (for instance, Token A and Token B) to a liquidity pool. By doing so, they help facilitate trading between those tokens on the DEX.
Earning Fees: In return for providing liquidity, LPs earn up to 0.5% in trading fees generated from trades in that pool. These fees are proportional to your share of the pool's total liquidity.
Risks and Impermanent Loss
While staking in liquidity pools can be lucrative, it comes with risks, including impermanent loss.
Impermanent loss occurs when the price ratio of the tokens in a liquidity pool changes after you've deposited them. This can result in a situation where the dollar value of your deposited tokens is less than if you had just held the tokens outside the pool.
To mitigate risk, consider the following strategies:
Diversify Your Staking: Just as with traditional investments, don't put all your eggs in one basket. Spread your investments across different pools and types of assets to mitigate risks.
Stay Informed About Market Trends: Keep an eye on market trends and the performance of the assets in your pool. If the market is showing signs of high volatility, it may increase the risk of impermanent loss.
Use Stablecoin Pairs: Pools that pair a volatile asset with a stablecoin can offer a lower risk of impermanent loss, as the price of the stablecoin is designed to remain constant.
Long-term Perspective: Consider the long-term potential of your investment. Impermanent loss can be offset by the fees you earn from providing liquidity, but this often requires a longer-term approach.
Risk Assessment: Always assess your risk tolerance. High-yield pools often come with higher risks, including the risk of impermanent loss.
Regular Monitoring: Regularly monitor your investments and be ready to adjust your strategy if market conditions change significantly.
Liquidity Pool Staking FAQ
Why do I have to pair tokens to stake them in liquidity pools?
This is based on the concept of an AMM (Automated Market Maker), which allows tokens to be traded against a pool in which token holders have staked tokens. When people trade against this exchange pool, the exchange rate changes based on what people are buying/selling.
What is liquidity pool staking?
On Unit Network, liquidity pool staking allows the exchange pool to have tokens which people can trade against. There is a small fee that gets taken and added to the pool when people trade, incentivizing people to stake tokens in order to provide liquidity.
Can I trade any token for any other token on Unit Network directly?
Each token created on Unit Network has its own liquidity pool, paired with USDU, the US dollar stablecoin of the Unit Network, as TOKEN-USDU. A person trading TOKEN for USDU or USDU for TOKEN trades with the pool, rather than directly one-on-one with another individual buyer or seller. Once the one token is added and the other is removed from the pool, minus the fee for trading, the ratio in the pool adjusts back to 50-50 value, and the price of one in terms of the other is changed. Similar to the functionality on https://uniswap.org/.