Crypto liquidity pools play an essential role in the decentralized finance (DeFi) ecosystem, in particular when it comes to decentralized exchanges (DEXs). Decentralized finance aims at the decentralization of conventional financial services such as lending, borrowing, and exchanges. Over the course of time in recent years, DeFi protocols have achieved formidable popularity.
Interestingly, a major share of the growth of DeFi points towards the decentralization of liquidity by leveraging global liquidity pools which entails that decentralized exchanges, synthetic assets, yield farming, borrow-lend protocols, and on-chain insurance utilize the concept of liquidity pooling effectively..
There is no doubt that DeFi has initiated an unprecedented growth in on-chain activity. Interestingly, the volumes of transactions on decentralized exchanges or DEXs could easily compete with centralized exchanges. With around 15 billion dollars of value locked in the DeFi protocols, the DeFi system is expanding continuously.
AN INSIGHT ON LIQUIDITY POOL:
Before automated market makers (AMMs) came into play, crypto market liquidity was a challenge for DEXs on Ethereum. At that time, DEXs were a new technology with a complicated interface and the number of buyers and sellers was small, so it was difficult to find enough people willing to trade on a regular basis. AMMs fix this problem of limited liquidity by creating liquidity pools and offering liquidity providers the incentive to supply these pools with assets, all without the need for third-party middlemen. The more assets in a pool and the more liquidity the pool has, the easier trading becomes on decentralized exchanges.
Liquidity pools are a mechanism by which users can pool their assets in a DEX smart contract to provide asset liquidity for traders to swap between currencies. Liquidity pools provide much-needed liquidity, speed, and convenience to the DeFi ecosystem. When a user supplies a pool with liquidity, the provider is often rewarded with liquidity provider (LP) tokens. LP tokens can be valuable assets in their own right, and can be used throughout the DeFi ecosystem in various capacities.
THE WORKING MECHANISMS OF LIQUIDITY POOLS:
Usually, a crypto liquidity provider receives LP tokens in proportion to the amount of liquidity they have supplied to the pool. When a pool facilitates a trade, a fractional fee is proportionally distributed amongst the LP token holders. For the liquidity provider to get back the liquidity they contributed (in addition to accrued fees from their portion), their LP tokens must be destroyed.
Liquidity pools maintain fair market values for the tokens they hold thanks to AMM algorithms, which maintain the price of tokens relative to one another within any particular pool. Liquidity pools in different protocols may use algorithms that differ slightly. For example: Uniswap liquidity pools use a constant product formula to maintain price ratios, and many DEX platforms utilize a similar model. This algorithm helps ensure that a pool consistently provides crypto market liquidity by managing the cost and ratio of the corresponding tokens as the demanded quantity increases.
LIQUIDUTY PREMIUM POOL
A liquidity premium is any form of additional compensation that is required to encourage investment in assets that cannot be easily and efficiently converted into cash at fair market value.
For example, a long-term deal will carry a higher interest rate than a short-term bond because it is relatively illiquid. The higher return is the liquidity premium offered to the investor as compensation for the additional risk. Investors in illiquid assets require compensation for the added risk of investing their money in assets that may not be able to be sold for an extended period, especially if their values can fluctuate with the markets in the interim.
Theory of Interest:
The liquidity premium theory of interest rates is a key concept in bond investing which focuses on the question of how quickly an asset can be sold in the market without lowering its stated price. It follows one of the central tenets of investing: the greater the risk, the greater the reward. The theory is one of several that collectively seek to explain the shape of the yield curve the interest rates that investors receive for buying bonds of different maturities.
The following is an example of the liquidity premium theory in action from an Iowa State University online PowerPoint presentation:
Suppose one-year interest rates over the next five years are 5%, 6%, 7%, 8%, 9%,
Liquidity premiums for one to five-year bonds are 0%, 0.25%, 0.5%, 0.75%, 1.0%
Then, interest rate on the two-year bond: (5% + 6%)/2 + 0.25% = 5.75%
Interest rate on the five-year bond: (5% + 6% + 7% + 8% + 9%)/5 + 1.0% = 8%
Interest rates on one to five-year bonds: 5%, 5.75%, 6.5%, 7.25% and 8%."
LIQUIDITY PREMIUM PROTOCOL AS PROPOSED BY ARC FINANCE
Arc finance: is an underlying Tokencomics of Defi 2.0 aiming to build a LaaS (Liquidity as a Service) basic economic infrastructure and also using an AUM algorithm built on Binance Smart Chain, Arc Finance also applies the mechanism of premium mining pool protocol to incentivize the positive behavior of users to create liquidity premium, with which the platform captures premium value to activate the economic ecology of the market.
LPP stands for Liquidity Premium Mining Pool Service Protocol, which is an important ecological sector of Arc Finance. It allows users to earn quick income in the transaction process. The more transactions users participate in, the greater premium income they will obtain, and the more income will be stored in the mining pool, which forms a positive economic cycle and amplifies the value of liquidity. This is a broad economic and ecological concept, not a simple, specific mining pool.
In Arc Finance, LPP is composed of three sections, including single token LP mining pool protocol, LP pair mining pool protocol and re-minting LP mining pool protocol.
SINGLE TOKEN LP MINING POOL PROTOCOL
Users use project tokens and ARC LP tokens, which serve as liquidity vouchers, to earn a triple return: the unlocking income of the token premium, the additional platform token reward, and the transaction fee tax refund during the transaction.
The unlocking speed is proportional to the number of lock LP tokens, and the calculation formula is as follows:
Unlocking speed= k * the amount of locked LP.
k=0.00000029 rToken/LP/Block（Amount of r-Tokens unlocked per Block chain
COMBINED LP MINING POOL PROTOCOL
Users select the project token A and B supported by Arc Finance.
Arc Finance automatically generates corresponding A-B staking
through smart contracts.
Users automatically get the corresponding A-B staking ratio that is newly generated.
Users can obtain higher APY corresponding to the combined LP mining pool protocols when they stake the tokens.
Two profits are created by staking dual tokens (staking proof):
Premium earnings, Staking earnings.
Unlocking speed=k*(Amount of locked ARC)
REAL-TIME SWAP MINING POOL PROTOCOL
Profits by unlocking are obtained through LP swap (swap volume proof), and frequent swaps accumulate trading volume proofs to accelerate profit release.
Unlock speed=α*(Swap volume)/rToken current price.
α= 0.0000029 (Amount of r-Token unlocked in each block time).
For more details, use the links below:
Social media links:
Telegram Chat: https://t.me/ArcFinance_global
Telegram Announcement: https://t.me/ArcFinance_announce