Home > Getting Started > What Are Pools And How Do They Work?

What Are Pools And How Do They Work?

Blog_illustrations-02

Every pool within the system is represented by a pair of tokens. Pools are populated with tokens by users who wish to take advantage of the fees and earn revenue on deposits. Poolers are incentivized to deposit an equal value of both tokens into the pool, otherwise, an arbitrage opportunity would be created. Poolers are thus pretty honest when creating or adding to pools. After all, they are depositing tokens to make future revenue on fees. When adding to a pool, everyone is incentivized to add token pairs at the current price ratio.

A 0.30% fee is charged to the swapper, which is deposited to the pool whenever a swap happens. To recover fees, poolers must exit the pool or close their position, which will effectively payout their proportion of the fees. It is important for poolers to actively manage their orders and update them in response to the activity of others in the marketplace.

Pool Tokens

When you add liquidity into a pool, you receive pool tokens, or liquidity tokens, which are minted from the contract and sent to your address. These pool tokens represent your share of the contribution to the pool. The proportion of the assets added to the pool are calculated and then sent. Whenever a swap occurs, a 0.30% fee is charged, which is distributed pro-rata to all of the poolers when the trade is completed. To recover fees, liquidity providers interact with the contracts and burn the liquidity tokens, exchanging them for their portion of the pool plus the fee allocation.