Liquidity Pools & LP Token
What are liquidity pools ?
Liquidity pools are places to pool tokens (which we sometimes call liquidity) so that users can use them to make trades in a decentralized way. These pools are created by users and decentralized apps (or Dapps, for short) who want to profit from their usage. To pool liquidity, the amounts a user supplies must be equally divided between two tokens: the primary token (sometimes called the quote token) and the base token (KYOCOIN). Our KyotoDEX's liquidity pools allow anyone to provide liquidity.
What is LP Token ?
When anybody deposit tokens into the liquidity pools, they will receive LP Token. If for example a user deposited KYOCS token and KYOCOIN into a pool, they would receive KYOCS-KYOCOIN LP Tokens. These tokens represent a proportional share of the pooled assets, allowing a user to reclaim their 'deposited tokens' at any point. Every time another user uses the pool to trade between KYOCS and KYOCOIN, a 0.3% fee is taken on the trade, 0.25% of that trade goes back to that particular liquidity pool and will be shared by the liquidity providers based on their proportionate holdings in the liquidity pools. The fee will be added to the amount of token the user is giving. For example if a user wants to swap 100 KYOCOIN (give) for 100 KYOCS (receive), the user will have to provide 100.30 KYOCOIN, if the user is swapping 100 KYOCS for 100 KYOCOIN, the user will have to provide 100.30 KYOCS.
The value of the LP Tokens, which represent the shares of the total liquidity each pool, is updated with each trade to add their value relative to the tokens the pool uses to trade. If previously there were 100 LP Tokens representing 100 KYOCOIN and 100 KYOCS, each token would be worth 1 KYOCOIN & 1 KYOCS (note in this example, KYOCOIN and KYOCS are the same relative value for the ease of clarity). If a user were then to trade 10 KYOCOIN for 10 KYOCS in that pool, and another user were to trade 10 KYOCS for 10 KYOCOIN, then there would now be 100.025 KYOCOIN and 100.025 KYOCS. This means each LP Token would be worth 1.0025 KYOCOIN and 1.0025 KYOCS now when it is withdrawn.
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