Liquidity Pools

A liquidity pool is fundamentally a collection of funds locked in a smart contract.

For trades to happen, both buyers and sellers have to converge on the price. However, there are times when orders at fair price level are missing, or where there are simply not enough orders for users to trade without slippage.

A market-maker solves this problem by being willing to always buy or sell a particular asset. Centralized exchanges partner with large institutions who play the role of a market-maker. They profit off the difference between bid and ask prices.

In a decentralized exchange, users themselves can take a share in market-making profits by providing liquidity to a swap pool. Users deposit their assets into a common pool which is then managed by an Automated Market Maker algorithm. In return, they obtain liquidity-pool tokens, which is basically a claim ticket to the assets in the pool. The number of tokens issued to the user is proportional to the amount of assets they deposit.

Different pools are designed to have different compositions of assets. It is advised that beginner users deposit assets in proportion to these pre-determined weights.

Liquidity Providers are rewarded for "market-making" in the form of trading fees, block rewards, and SWTH inflationary supply. This is subject to change as our incentive system changes.