Liquidity Pools
What is a Liquidity pool?
A liquidity pool is a collection of funds locked in a smart contract. Liquidity pools are used to facilitate decentralized trading, lending, and many more functions that the ShibaSwap supports.
To pool liquidity, the amounts a user supplies must be equally divided between two coins: the primary token and the base token.
When you add to a liquidity pool you will receive Shiba Swap Liquidity Provider tokens (SSLP tokens). These tokens represent a proportional share of the pooled assets, allowing a user to reclaim their funds at any point.
For example, if a user deposited $SHIB and $ETH into a pool, you would receive ETH-SHIB SSLP tokens.
Every time a user trades between $SHIB and $ETH or any other coin pair on ShibaSwap,
a 0.3% Liquidity Provider Fee is taken on the trade.
If that trade involves $WBTC or $USDC i.e if $WBTC or $USDC is swapped for another token
0.1% of the fees for that trade goes back to the $LEASH-ETH LP pool as $WBTC & $USDC
If that trade involves $DAI or $USDT i.e if $DAI or $USDT is swapped for another token
0.1% of the fees for that trade goes back to the $BONE-ETH LP pool as $DAI & $USDT
How does it Work?
Let's begin by assuming
a Liquidity pool of $USDC and $SHI (an imaginary(!) coin) that contains 10 USDC & 1000 $SHI
Starting value of $SHI is 0.01 USD (10/1000 = 0.01)
Starting value of a new coin like $SHI is determined by the ratio of the assets in the Liquidity pool for a new coin.
ShibaSwap follows Uniswap V2 in how it defines liquidity.
Uniswap V3 has additional requirements. Since they don't apply to ShibaSwap, it won't be explained in detail.
A buy happens
Assuming a swap from $USDC to $SHI - 1 USDC is being used to buy $SHI
The trade happens from the Liquidity pool of $USDC and $SHI
This pool is governed by a formula called Constant product formula
where
x is the quantity of first token in the pair
y is the quantity of the second token in the pair
k is the product of x and y and it should always remain the same
This formula is used to determine the price appreciation and depreciation of the coins in that LP pair.
Before the trade
x = 10 ($USDC)
y = 1000 ($SHI)
k = 10 * 1000 = 10000
After this trade goes through
x = 10 + 1 = 11 ($USDC)
y = ? How much $SHI should be returned, as we need to keep k = 10000
going by
=> 10000/11 = 909.0909090909
Now, to keep k at 10000 with x at 11 we only need y to be 909.0909090909
Current count of y = 1000
Difference between starting/current count of y and the calculated count = 1000 - 909.0909090909 = 90.9090909091
This means we have an extra 90.9090909091$SHI coins in the pool
This is what will be returned to the user in exchange of 1 $USDC
Let's now calculate the current USD value of $SHI coin
Before the swap
Value of coins
1 $USDC = 1 USD
1 $SHI = 0.01 USD
from the ratio 10 $USDC : 1000 $SHI
1 $SHI = 10 / 1000 = 0.01 $USDC
This means 1 USD would have fetched you 100 $SHI
Swap Request
1 $USDC has now come in to pool
x = 11 ($USDC) i.e value of 1 $USDC = 1 USD
k = 10000 i.e 100 USD
y = 909.0909090909 $SHI as calculated above
An extra 90.9090909091$SHI coins in the pool
This means 1 USD now fetches you 90.9090909091$SHI instead of 100 $SHI
So the value of 1 $SHI now is 1/90.9090909091 = 0.011 USD
Now the LP pool that started with
10 $USDC and 1000 $SHI with 1 $USDC at 1 USD and 1 $SHI at 0.01 USD now has
11 $USDC and 909.0909090909 $SHI with 1 $USDC at 1 USD and 1 $SHI at 0.011 USD
A sell happened
Assuming a swap from $SHI to $USDC - 100 $SHI is being sold
The trade happens from the Liquidity pool of $USDC and $SHI
This pool is governed by a formula called Constant product formula
where
x is the quantity of first token in the pair
y is the quantity of the second token in the pair
k is the product of x and y and it should always remain the same
This formula is used to determine the price appreciation and depreciation of the coins in that LP pair.
Before the trade
x = 10 ($USDC)
y = 1000 ($SHI)
k = 10 * 1000 = 10000
After this trade goes through
x = ? ($USDC) How much $USDC should be returned, as we need to keep k = 10000
y = 1000 + 100 = 1100
going by
=> 10000/1100 = 9.0909090909
Now, to keep k at 10000 with y at 1100 we only need y to be 9.0909090909
Current count of x = 10
Difference between starting/current count of x and the calculated count = 10 - 9.0909090909 = 0.9090909091
This means we have an extra 0.9090909091 $USDC coins in the pool
This is what will be returned to the user in exchange of 100 $SHI
Let's now calculate the current USD value of $SHI coin
Before the swap
Value of coins
1 $USDC = 1 USD
1 $SHI = 0.01 USD
from the ratio 10 $USDC : 1000 $SHI
1 $SHI = 10 / 1000 = 0.01 $USDC
This means 100 $SHI would have fetched you 1 USD
Swap Request
100 $SHI has now come in to the pool
x = 9.0909090909 ($USDC) as calculated above but value of 1 $USDC = 1 USD
k = 10000 i.e 100 USD
y = 1100 $SHI as calculated above
0.9090909091 $USDC coins will be returned to the user
This means 100 $SHI will now fetched you 0.9090909091 $USDC instead of 1 $USDC
So the value of 1 $SHI now is 0.9090909091/100 = 0.009090909091 USD
Now the LP pool that started with
10 $USDC and 1000 $SHI with 1 $USDC at 1 USD and 1 $SHI at 0.01 USD now has
9 $USDC and 1100 $SHI with 1 $USDC at 1 USD and 1 $SHI at 0.009090909091 USD
Liquidity Pools on ShibaSwap
Liquidity providers have two choices after Adding Liquidity
They can choose to
Hold the SSLP tokens with them and earn a proportional percentage of Swap fees
Enter the Farm and drop their SSLP tokens in one of the many WOOF pools and earn more rewards.
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