🌊Staking And Liquidity Pools
Providing liquidity for decentralized trading pools through verified third-party platforms.
Last updated
Providing liquidity for decentralized trading pools through verified third-party platforms.
Last updated
Liquidity is used to describe the available token assets deposited into a pool, which can be used to convert a cryptocurrency, token, or asset into another cryptocurrency, token, or asset. Available liquidity is a crucial factor in fighting slippage during swaps or allowing operations for other types of protocols like lending, borrowing, and more.
A liquidity pool summarizes a reserve of cryptocurrency or tokens locked in a smart contract by individual parties for use during trades, swaps, and more through decentralized cryptocurrency exchanges. Liquidity pools usually consist of two individual tokens that make up "trading pairs".
Automated Market Makers (AMMs) are a popular substitute for regular order-book exchanges utilized by decentralized exchanges. The AMM model is highly dependent on liquidity pools and functions on mathematical models to initiate exchanges. Some popular examples of AMMs are UniSwap and SushiSwap on Ethereum and Orca and Raydium on Solana.
Yield farming (or liquidity mining) is a popular way that Automated Market Maker (AMM) protocols incentivize user liquidity deposits to ensure that the underlying liquidity pools feature deep liquidity.
Liquidity providers, or users who provide liquidity to liquidity pools, are usually incentivized with tokens from the AMM provider in yield farming or liquidity mining models. These incentives are usually called "LP Fees" or "LP Rewards".
Rewards can be from several aspects of liquidity provision and may include tokens from the AMM protocol itself or from the project for whom the liquidity pool provides trading pairs.
The major risk involved while providing liquidity is designated as "Impermanent Loss" or IL.
Impermanent loss is defined by the loss of "fiat or $USD" value of liquidity provided to a pool while still deposited. This risk is made possible by the underlying structure of Automated Market Makers and their smart contracts. This mainly occurs when there is a change in the underlying value of tokens that make up a liquidity pool. As changes become significant, Impermanent Loss may be exacerbated.
Other risks like smart contract risks and community governance may apply to AMMs and their designated liquidity pools. We recommend researching protocols before interacting with swaps or providing liquidity. Incentives may also vary in value depending on supply and demand economics and trading pairs.
The CMFI token is featured on several third-party Solana AMMs. We have written guides for some of the most popular platforms. As always, do your own research and understand the risks associated with the use of these platforms before any interaction occurs.
We are not officially affiliated with these platforms in any way and they feature their own terms of use, mechanisms, and internal documentation.
