What is Liquidity pool
Liquidity maker and Liquidity pools, were first introduced by Uniswap, the basic concept is that the pool will store Token A and Token B, so that the pool gets a comparison of the amount, and raises a price.
For example, the pool holds 10 ETH and 5000 USDT, meaning that 1 ETH is worth 500 USDT.
How do swap transactions take place?
With the example above, if a user buys 1 eth from the pool, the pool conditions will be like this, 9 ETH vs 5500 USDT means 1 ETH is now worth around 611 USDT, the price is formed from a comparison of the number of tokens A and Token B in the pool.
Where does the profit shared ( APY ) come from
APY is generated from the amount of fees collected from transactions that occur
Benefits for liquidity maker.
As an example, we created a liquidity pool with a capital of 10,000 USDT in the ETH_USDT pair with an average APY of 240% with the current ETH price of 500 USD.
this is just an example, the APY may be lower on the pair.
- 5,000 USDT we buy ETH in any market and get 10 ETH
- 10 ETH + 5,000 We send it to the pool.
- We leave it for 1 month, and the price of ETH goes up to 1,000 USDT, then our funds in the pool change to (2.5 ETH + 7,500 USDT) + 2%
- If we withdraw all and sell all ETH to 10,000 + 20% (APY 240% / 12 Months) Profit 2,000 USDT
This means that the increase or decrease in the price of a token does not affect the amount of profit generated, the profit generated is the initial capital + APY value.
Creating liquidity in the pool is a safe way of investing to get passive income.