*This post was reposted from Tealswap Medium.
Hello everyone, how have you been?
In the last post, we explored the role of Tealswap as a protocol within Oasys, and how to swap tokens at Tealswap.
While we eagerly await our next milestone, Multifarming, for those who haven’t seen it yet, please refer to the post below.
As we anticipate our upcoming milestone, Multifarming, let’s explore the fundamental investment options available on Tealswap — specifically, diving into liquidity provision and how you can get started with it.
Understanding Liquidity Provision
The method for determining token values in DEX: Liquidity
Tealswap operates as a Decentralized Exchange (DEX), which differs in mechanism from traditional exchanges in Web2.
It doesn’t rely on the concept of an “order book.” Instead, its price determination mechanism for exchanging two cryptocurrencies is distinct.
Tealswap operates based on the Automated Market Maker mechanism, where the price within a liquidity pool of a token pair consisting of two tokens, A and B, is determined by the ratio of their quantities in A token-B token liquidty pool.
While the underlying principle is the Constant Product Market Maker (CPMM), we’ll focus on providing a simplified explanation here for better understanding. Similarly, all figures in this post are simulated just for easy understanding.
If a user significantly trades Token A for Token B within the pool, the portion of Token B in the pool compared to Token A decreases substantially.
Consequently, for the next user attempting a swap, the value of Token B in terms of Token A will increase significantly. This allows users to provide a small quantity of Token B and receive a much larger amount of Token A in return, compared to their transactions in the past.
What is LP Tokens?
Those tokens, Token A and Token B within the liquidity pool are provided by Liquidity Providers, also known as LP users.
Liquidity providers offer liquidity to the pools corresponding to the token pairs they want to provide liquidity for, according to the current swap ratio, and receive LP Tokens in return.
If liquidity providers hold this LP token, they would receive rewards, which are derived from the swap fees paid by traders.
Think of these LP Tokens as some sort of “proof” representing the liquidity a user has provided. LP Tokens are awarded proportionally to the actual provided liquidity amount.
For more detailed explanation, let’s assume that the user C’s provided liquidity at Tealswap as below:
Providing 20 tokens of A and 5 tokens of B (with the current pool ratio of 4:1) in exchange for receiving 0.1 LP Tokens as compensation, the user C’s portfolio will appear as follows, after immediately supplying liquidity:
Just keep in mind that if other users perform a significant amount of swaps, withdrawing a substantial amount of token A from the liquidity pool and causing a change in the pool’s token quantity ratio, the number of LP Tokens you possess won’t change.
However, the actual quantities of tokens A and B per your LP Tokens might not remain the same as when you initially provided liquidity.
Therefore, assuming no liquidity addition or removal actions by you, the only constant within the portfolio would be the number of LP Tokens you hold.
Reward for Liquidity Provision
When you perform a swap, the imposed swap fee is added as a reward to each LP Token. If other users have executed swaps resulting in the imposition of swap fees, user C’s portfolio could change as follows:
(For convenience, let’s assume that the liquidity pool’s token A and token B ratio remains unchanged.)
As a next step,shall we learn how we can supply and remove liquidity at Tealswap?
How to Provide (Add) liquidity at Tealswap
- First Token Information Section
- Second Token Information Section
- Slippage Tolerance
Step1. Select Token to provide liquidity to the pool
When you select a token, the other paired token from the liquidity pool where the selected token exists will be activated.
For instance, if you choose OAS and MCHC, you’ll be supplying liquidity to the OAS-MCHC liquidity pool.
Step2. Input liquidity and check expected result
When you input the liquidity for one token, the amount of the other token will also be determined according to the current pool’s token ratio. At this point, both token amounts should not exceed the balance you hold.
Additionally, at the bottom, you can see the estimated value of LP Tokens you will receive as a result of this liquidity provision.
If the amount you entered for the tokens are not approved, some approval processes for the each of unapproved tokens are required before the “Add liquidity” can be executed.
Please note that OAS, being Oasys’ native token, does not require separate approval.
Step4. Provide(Add) liquidity
Click the “Add liquidity” button to do liquidity provision.
Step 5. Check result
You can check the processing status of your requested liquidity provision transaction on the result screen, and you can also verify it on the Oasys explorer by clicking the “Go to Explorer” button.
By clicking the ‘Check Portfolio’ button, users can navigate to the Portfolio section, where they can see their current liquidity provisioning status as follows:
- The amount of tokens supplied by the user through liquidity provision (calculated based on the actual two token pair’s ratio within the pool), along with the quantity that includes LP rewards aligned with the token ratio within the pool.
- The quantity of LP tokens that the user holds.
- The amount of each token converted to its dollar value.
Please note that this value is calculated based on the total dollar value of the two tokens’ quantities allocated to the LP tokens that you currently hold.
As a result, it may increase or decrease depending on the dollar value fluctuation on the token market like CoinmarketCap or Coingecko of the target tokens.
It also may depending on the fluctuation in the quantity ratio of the two tokens within the pool.
How to Remove liquidity at Tealswap
In Tealswap, users have the ability to remove the liquidity they have provided.
If there have been swaps since the liquidity was added, when a user decides to remove liquidity, they will receive the amount of tokens equivalent to the liquidity they provided, plus any LP rewards earned during that period.
- Selecting the liquidity pool
- Liquidity removal Information section
- Estimated Amounts of Two Tokens You Will Receive Upon Liquidity Removal
Step 1. Select the liquidity pool
Step.2 Enter the amount to remove liquidity
Please enter the amount of LP Tokens you wish to return, which you received as compensation for providing liquidity to the selected liquidity pool. Note that users cannot remove more than the amount of LP Tokens they own.
Once you input this value, you can check the estimated values of the two tokens you will receive upon returning the corresponding amount of LP Tokens.
Similarly, this value may also be updated based on the current liquidity pool’s token ratios.
If the amount you entered for the LP tokens are not approved, an approval processes for the LP Token are required before the “Remove liquidity” can be executed.
Step4. Remove Liquidity
Click the “Remove Liquidity” button to remove liquidity.
Step5. Check result
You can check the processing status of your requested liquidity removal transaction on the result screen, and you can also verify it on the Oasys explorer by clicking the “Go to Explorer” button.
The results of liquidity removal can also be viewed by clicking the “Check Portfolio” button and navigating to the Portfolio section, where users can see the details of their liquidity removal and how it has affected their overall portfolio.
Thus, we have explored the process of providing and removing liquidity on Tealswap.
Let’s Fly with Tealswap!
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