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 occured.

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.

  1. 5,000 USDT we buy ETH in any market and get 10 ETH
  2. 10 ETH + 5,000 We send it to the pool.
  3. 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%
  4. 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.