Liquidity on CENNZX
Translations can be found here:
The CENNZX exchange provides an easy and instant way for token holders to exchange their tokens. It works by maintaining a constant supply of liquidity in liquidity pools. Liquidity is provided by token users who want to use their tokens to create value from them.
In this article, we will explain how liquidity works, how you can earn rewards and the concept of impermanent loss.
What is CENNZX?
CENNZX is an open-source decentralised automated exchange runtime module built on the CENNZnet blockchain. The CENNZX exchange uses Automated Market Maker (AMM) technology to replace the traditional exchange order book with a system of on-chain pre-stoked token stores, known as liquidity pools. This is the same system used in other famous decentralised exchange contracts like Uniswap.
DEX platforms are disconnected from external markets, meaning that changes to the token price on external markets will not affect prices on the DEX. For the prices to change on an AMM, arbiters need to purchase the unpriced asset or sell the overpriced asset offered by the AMM.
What are liquidity pools?
Liquidity pools are essentially a pot of tokens locked into a smart contract that users can then trade against. They are known as liquidity pools because they allow the overall decentralised system to have liquidity, or the ability to quickly convert one asset into another without it losing its value. The liquidity (available tokens for trade stored in the liquidity pools) is provided by other traders on the CENNZX DEX. These liquidity providers can earn rewards on their deposits into a pool by earning a share of the transaction fees paid by traders.
Separate liquidity pools are required for every exchange pair. For example, on CENNZX all liquidity pools contain the gas token CPAY and then the specific generic asset you can trade in CPAY for. So those pools currently look something like this:
Why is liquidity important on CENNZX?
Liquidity is the constant store of tokens available in the network’s liquidity pools that allows instant transfer of tokens. Liquidity is essential for CENNZX as it means there is always a ready store of CPAY and CENNZ available for traders to exchange their tokens.
Note: It’s impossible for traders to exchange token A for token B if there is no token B pool in CENNZX. For example, they couldn’t trade CPAY for CENNZ if there is no CENNZ in the pool.
Adding liquidity
Anyone with an internet connection and in possession of two types of CENNZnet token (e.g CENNZ and CPAY) can become a liquidity provider. Liquidity providers supply tokens to liquidity pools in exchange for a share of the exchange/ trading fees.
CENNZX is a DEX so it isn’t aware of the price of an asset on other exchanges. However, because it’s still very early for CENNZX, the liquidity providers are still growing, we expect that the price difference between centralised exchanges and CENNZX will also get smaller. In the meantime, you can become a liquidity provider and take advantage of the larger spread.
How do liquidity providers make rewards?
When people use the CENNZX exchange they pay a network fee of 0.3%. This fee boosts the overall number of tokens held in the pools over time.
When liquidity providers deposit their tokens into a liquidity pool, the CENNZX Runtime notes what proportion of the tokens in the pool belong to them. The provider can then withdraw their tokens at any time and receive the same proportion of the fees from the token pool that they put in. If the number of tokens in the pool at that time is much higher than when the provider made their deposit, they will earn a significant increase on their rewards.
Providers can add liquidity to the CENNZX liquidity pools at any time using the exchange UI or any other UI the community develops or even by calling the API directly or using a bot to do it for you.
It’s important to note that, in order to preserve the token ratio providers must deposit an even balance of both tokens for their chosen liquidity pool. E.g if you wish to deposit CENNZ you must also deposit the proportional ratio of CPAY. This ensures the liquidity pool balance is preserved.
What about Impermanent loss?
You might have heard the term Impermanent loss. This is a risk associated with providing liquidity. It occurs when the price of your deposited assets (in the liquidity pool) changes compared to the price they were when you deposited them. The greater this change is the more significant the impermanent loss can be.
Why is it called impermanent loss? Because it is only realised if you withdraw your tokens when the price difference exists. If you wait for the AMM to return to its original price balance then you will have your full token value restored or you could have earned even more rewards.
Got more questions?
You can get all the help and support you need from our active CENNZnet Discord Community.
