Understanding Liquidity Pools: The Backbone of Decentralised Finance.
Liquidity pools play a large part in creating a liquid decentralized finance (DeFi) system.
The prevailing theme in modern-day finance is decentralisation wherein financial services are rendered without an intermediary.
However, the elements of decentralisation come in different forms, while the core idea remains the same.
Decentralised Financial services are built safely on a cryptocurrency ecosystem, which ensures the secure and transparent execution of transactions. These ecosystems are underpinned by blockchain technology, providing a trust layer that eliminates the need for traditional financial intermediaries and allows for direct, peer-to-peer interactions.
TON Blockchain is just another Decentralised Cryptocurrency Ecosystem built safely on the Blockchain Trust Layer.
TON’s decentralised financial services (DeFi services) range from Decentralised Exchanges (DEX) to others like Decentralised Applications (dApps), DAOs, Decentralised NFT Marketplaces, and Decentralised Computing platforms.
Notwithstanding DeFi’s position as the future of global finance, exponential growth is hindered by a lack of mass adoption. Andreas M. Antonopoulos, a well-known advocate for Bitcoin and blockchain technology has this to say “Mass adoption of cryptocurrency will happen when the technology becomes invisible and the user experience is seamless. We need to focus on building applications that users find useful, intuitive, and that integrate effortlessly into their daily lives.”
Seamless UX can be achieved by improving the UI, creating an intuitive user experience, and giving financial incentives to TON users. It is the common interest of on-chain users from newbies to experienced investors — everyone’s on a search for ways to grow their portfolio.
Comprehensive guides and tutorials are essential to show users certain aspects of financial incentives.
Enter into Financial Incentives on Ston.Fi
Ston.Fi is a Decentralised Exhange using a decentralised automated market maker (AMM) built on the TON blockchain providing virtually zero fees, low slippage, an easy interface, and direct integration with TON wallets.
Ston.Fi offers services including swapping tokens, cross-chain interactions, staking, farming and supplying Liquidity pools. I will address everything relating to Liquidity Pools on Ston.Fi in this post. Equally, I will create guides in upcoming writings to demystify the process of getting started and earning from available Liquidity pools.
What Are Liquidity Pools?
Liquidity pools are collections of cryptocurrencies or tokens. These pools provide liquidity for trading pairs on decentralised exchanges, facilitating smooth and efficient transactions without relying on traditional market makers.
It acts as a kind of “reservoir with cryptocurrencies”, or more precisely — two scales, where an equal amount of tokens is on each side in terms of value. These liquidity pools are managed by Decentralised Exchange Smart Contracts: during a swap, the required amount of Token A is taken from one side of the scale, and the amount of tokens given by the trader, Token B, is placed on the other side.
The Importance of Liquidity Pools
- Compared to traditional exchange methods, the liquidity pool ensures that transactions are executed as quickly and safely as possible: users do not need to wait for someone with the required amount of tokens — the assets are always available for trade in the liquidity pool.
Liquidity pools also offer faster and more efficient trades in contrast to order books. In the absence of a traditional order book, the price gaps, or “spreads,” that often occur between buy and sell orders are eliminated. - With automated, algorithmic trading, trades in liquidity pools can be executed instantly with minimal slippage, provided there is sufficient liquidity. This is achieved by matching buyers and sellers directly within the pool, rather than relying on an order book. Additionally, the system is self-sustaining as users are incentivized to provide liquidity in exchange for rewards, ensuring smooth and efficient trading operations.
- For developers, liquidity pools enable the creation of decentralized liquidity, which is essential for many decentralized applications (dApps). Early decentralized exchanges (DEXs) faced challenges in maintaining liquidity while attempting to replicate traditional market makers. Liquidity pools addressed these challenges by incentivizing users to provide liquidity directly, rather than relying on order books to match buyers and sellers. This innovation has been crucial for the rapid expansion of the DeFi ecosystem.
Ston.Fi Liquidity Pool Model
Ston.fi uses the most popular type of Liquidity Pool, the Automated Market Makers (AMMs) — an algorithm that adjusts prices based on supply and demand within the pool.
Ston.fi Liquidity pools are designed to reward certain users (Liquidity providers) who supply Liquidity (tokens) into the available Liquidity pools. They receive a percentage for each transaction within the pool.
Liquidity Rewards Breakdown on Ston.Fi
Provider’s rewards stand at 0.2% of the transaction amount done in the pool they participate in. These 0.2% are distributed among all liquidity providers in proportion to their share in the pool (for example, whoever provided 50% of all liquidity will receive half of 0.2% of each transaction in that pair).
The rewards are issued in tokens called liquidity provider tokens (LPTs). LP tokens rewarded can then be used in different ways on the Ston.Fi network depends on the interest of the Liquidity provider. LP tokens are useful in Farming which involves earning additional rewards for liquidity provision.
Learn more about Farming On Ston.Fi here.
How can you provide liquidity and receive a percentage of the fees?
Of course! I will talk about this in the next post. Read about it Here!
Wrapping Up
Ston.Fi, a decentralized automated market maker (AMM) on the TON blockchain, offers near-zero fees, low slippage, and a user-friendly interface integrated with TON wallets. By providing liquidity to pools on Ston.Fi, users can earn rewards of 0.2% per transaction, distributed based on their share in the pool.
These rewards are issued as liquidity provider tokens (LPTs), which can be utilized for additional farming rewards on the platform.
