How to Provide Liquidity in Nimera Swap
When providing liquidity, you temporarily deposit tokens into a pool, effectively becoming a market maker for that pool.
For example, here we have a WTBC-BTC pool.
When entering liquidity, you may choose to add both currencies at the same time, For example, 0.5 WBTC and 0.5 BTC. In this case, your ownership proportions of the two currencies will be equal.
A crucial part of the pool’s mechanic to understand, is that when traders come to the pool to make a swap, your ownership proportions of the funds will change.
The proportions of the assets you add to the pool is dynamic.
For example, let's imagine that you are the only Liquidity Provider, and you've added 1 BTC and 19,000 USDT to a pool. When a user swaps 300 USDT to BTC, the following actions occur according to the pool's math:
- The user sends 300 USDT to the pool
- The pool sends 0.01554404 BTC to the user (according to the pool math)
- After these transactions, your pool balances change as follows: 0.9847621 BTC and 19300 USDT.
This example is valid in the case of zero exchange/swap fees. In real conditions, Nimera Swap charges a commission for exchange operations and returns part of this commission to the pool balances. You, as a Liquidity Provider, own this commission according to your ownership stake in the pool and can cash it out by withdrawing liquidity from the pool.
Depending on the pool’s volatility and volume, the fees that you gain will outweigh any potential losses that you sustain from receiving a cheaper currency. In general, the more liquidity there is in the pool — the more stable the price.
- Pools with high liquidity = stability.
- Pools with low liquidity = volatility.