💎Liquidity

What is providing liquidity:

Unlike the traditional order book model, in which buyers and sellers have to specify prices to trade, the AMM model uses the concept of the liquidity pool to make the trading process more efficient.

In AMM model, the person providing liquidity is called the liquidity provider(LP). LP can choose any token pair (eg:USDC and ETH) that he/she would like to provide liquidity to, and deposit both tokens in the designated liquidity pool (or create a new one if it doesn't already exist). Then based on the liquidity of the assets in the pool, the AMM's algorithm will be able to give quotes on the trading prices of different token pairs to the buyers and sellers that come to trade. In exchange, the LP will receive LP tokens as proof that he/she has provided liquidity and rewards for providing liquidity.

Why provide liquidity:

OolongSwap charges users transaction fees when trading tokens. By providing liquidity to the liquidity pool, LPs can earn a portion of all the trades that happen on the token pair that they provide liquidity to. The transaction fees get automatically sent to the OLP tokens (the LP tokens of OolongSwap), therefore the OLP tokens rise in value over time.

What are the risks:

One risk users might face when providing liquidity to a token pair is impermanent loss(IL).

According to Binance academy, “Impermanent loss happens when you provide liquidity to a liquidity pool, and the price of your deposited assets changes compared to when you deposited them. The bigger this change is, the more you are exposed to impermanent loss. In this case, the loss means less dollar value at the time of withdrawal than at the time of deposit.”

How much fees do Oolong charge:

It varies! One of the new features that OolongSwap introduces is dynamic fees. The fees charged to trade different token pairs varied due to the nature of the risks that different LP providers have to face. Most pairs will default to a 0.3% fee. Learn more about this on the dynamic fees page.

What if I don’t want to provide liquidity anymore:

Users can redeem their OLP tokens for the underlyings at any time and receive the two original tokens that they deposit into the liquidity pool, along with the rewards that have accrued in the process.