About LPs

What is a liquidity pool?

A liquidity pool is a collection of tokens locked in a smart contract. Liquidity pool forms the backbone of the HydraSwap DEX, where LPs add equal value of two tokens into a liquidity pool to enable efficient asset trading and generate returns. A liquidity pool creates a market for the particular pair of assets (e.g. SOL/USDC), and when you want to buy a particular asset, there does not need to be someone with the opposite interest, but only sufficient liquidity in the pool. This is unlike the order book model often seen in traditional stock exchanges and CEXes, where buyers and sellers place orders and the trade would be done when both buyer and seller agree on the price.

Why should I provide liquidity on HydraSwap?

By providing liquidity on HydraSwap, you will be able to earn LP tokens representing your portion of the liquidity pool and earn trading fees. HydraSwap charges a 0.3% trading fee, and 0.25% of the fee will go back to the LPs. Additionally, you would be able to minimize impermanent loss by providing liquidity at HydraSwap with HMM, as compared with other DEXes.

What is impermanent loss and how can HMM help?

While being a LP can be profitable, users should understand the concept of impermanent loss. Impermanent loss happens when the price of the tokens you have deposited into a liquidity pool changes as compared to when you deposited them in the pool. The bigger the changes in price, the more you are exposed to impermanent loss. Therefore, liquidity pools with assets that remain in a small price range (e.g. stable coins) are less exposed to impermanent loss in general. Despite the presence of impermanent loss, LPs could still generate revenue through trading fees. As HydraSwap aims to create a more sophisticated version of an AMM that could best benefit our users. With the introduction of a compensation parameter ‘c’ in our HMM model, it helps set the level of compensation LPs offer arbitrageurs to incentivise them to return the AMM pool to its original inventory balance. With ‘c’, it helps to find the sweet spot between constant product market maker and oracle price to help LPs reduce impermanent loss and increase fee income. For more details of HMM and details of the back testing result of ‘c’, please take a look at our blog post.

How are the $HYS APRs calculated?

The APRs are calculated as the token emission per day x token price x 365 divided by the total value locked (TVL).

What are LP tokens?

Liquidity provider tokens, or LP tokens are tokens issued to represent a LP’s share in the particular liquidity pool. For instance, if you contribute $10 USD worth of assets to a liquidity pool that is worth $100 USD in total, you would receive 10% of the pool’s LP tokens.

When can I withdraw my liquidity from a liquidity pool?

You can withdraw your liquidity anytime, to withdraw, simply follow the below steps:
  1. 1.
    Select “My Liquidity" in the “Add Liquidity"? page
  2. 2.
    Click “–" on the under “Actions"
  3. 3.
    Enter the amount of liquidity that you would like to withdraw
  4. 4.
    You can add your liquidity back anytime!