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Liquidity Pools

How does a Liquidity Pool Work?

Voltage charges a 0.3% fee for all trades, this fee is distributed to those who add liquidity to the token pair that was traded on.
A liquidity pool (LP) is a pool of two tokens, e.g. VOLT and Fuse tokens. This pool is what allows users to exchange between the two tokens automatically.
Users can earn a share of the trading fees by depositing a pair of tokens into the LP (also known as "adding liquidity"). Users will receive an LP token, representing their share of the LP.

Risks and Rewards

By adding liquidity you'll earn 0.3% of all trades on this pair proportional to your share of the pool. Fees are added to the pool, accrue in real-time, and can be claimed by withdrawing your liquidity.
Your share of the Trading Fees will be accrued in real-time and will be paid in $VOLT tokens on top of your existing position when you exit the Liquidity Pool
Providing liquidity is not without risk, as you may be exposed to impermanent loss (IL).
Impermanent loss is a simpler concept than most make it. When you create an LP token you have to have the equivalent $ value of each token. Both tokens have to move at the same rate upwards in order to not lose value when you go to split your LP tokens. Why would you lose money? Let's check out the math ๐Ÿ‘‡ Example: For this example use FUSE is and VOLT and 1 FUSE = 100 VOLT tokens. You have 1 Fuse and 100 Volt. You own 10% of the total pool, which is 10 Fuse and 1000 Volt.
You decide to make a LP token to earn a yield by combining the 2. Suppose while you are staking your LP token the price of FUSE goes up to 200 Volt. Remember the contract is making sure that your percentage of the total pool stays the same. So when you go to withdraw, the contract is going to give you 10% of the new total pool. Just because the value of the tokens you have deposited has gone up doesn't mean your share of the total pool has as well.
So after the change in price, there are about 7.07 Fuse and 1,414.21 Volt. This still is equivalant to 10,000 tokens for the total pool, the ratio is just different now. When you take your 10% you receive .707 Fuse and 141.21 Volt. To compare we will look at both in Volts.
So 141.21 + 141.21 = 282.42 Volts Now look at it from another angle, if you held your 1 FUSE / 100 VOLT in your wallet you would have 300 Volts in total. But you also can't farm with your tokens sitting in your wallet!
If the prices of the two tokens revert back to the same prices as when you added liquidity, you won't suffer any IL.
If you feel the yield for supplying liquidity outweighs the risks of fluctuation, then an Automated Market Marker is your best friend ๐Ÿ˜Ž

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How does a Liquidity Pool Work?
Risks and Rewards