Polkamarkets 101 Series: How liquidity works?
In today’s article of the Polkamarkets 101 Series, we cover the topic of how liquidity works in the Polkamarkets protocol. You will learn how to add and remove liquidity from markets, and what impact it has on the protocol. Polkamarkets 101 is a series of videos and extended Help Center articles that make it easier for users to get started with Polkamarkets.
How does liquidity work?
Liquidity Providers are essential to decentralized prediction markets. Before forecasters can buy and sell outcome shares in a prediction market, markets are required to have liquidity.
The benefits of adding liquidity to markets powered by Polkamarkets are the following:
- Liquidity Providers receive a fee from every buy/sell transaction. By default, the fee is set to 2% (developers who are deploying the Polkamarkets smart contract themselves can set this fee to any amount they like).
- The more liquidity is added to a market, the lesser the price impact when buying or selling outcome tokens, and the more accurate is the forecast.
There is, however, a risk of near-total loss for liquidity providers that must be well understood before adding liquidity to a market. We highly recommend that you read our article on Strategies and risks for Liquidity Providers before you decide to create a market or provide liquidity. You’re also welcome to join the Polkamarkets community in Discord to ask questions and debate strategies.
How do I add liquidity to a market?
Navigate to the market you wish to add liquidity to and click on Add Liquidity.
The number of liquidity shares you receive depends on the price of the outcomes.
The more one-sided a market is, the fewer Liquidity Shares you will receive. Instead of receiving Liquidity Shares, you will get compensated in outcome tokens — of the most/least probable event when adding/removing liquidity, respectively.
Select the amount of liquidity you wish to add and confirm the transaction.
How do I remove liquidity from a market?
Navigate to the market you wish to remove liquidity from and click on Remove Liquidity.
Similar to when adding liquidity, the number of liquidity shares you receive depends on the price of the outcomes. You will also claim your share of the fees collected from the liquidity pool when removing liquidity.
Select the amount of liquidity you wish to remove and confirm the transaction.
You can learn more in the help center, where you’ll find information regarding the following topics:
- Basic information about the Polkamarkets Protocol
- How to create a verifiable market
- POLK Token & Tokenomics
- Other Frequently Asked Questions
Polkamarkets is an Autonomous Prediction Market Protocol built for multi-chain information exchange and trading where users take positions on outcomes of real-world events–in decentralized and interoperable EVMs.