Liquidity Pools

What is a Liquidity Pool (LP)?

You could think of a Liquidity Pool as a big pile of funds that traders can trade against. Users can deposit an equivalent value of two tokens to a Liquidity Pool and in return receive LP tokens which represent their share of the Liquidity Pool. Liquidity providers earn fees from the trades that happen in their pool.

Slippage

Large orders may incur slippage due to the way AMMs work. It's important for a liquidity pool to attract liquidity, the more liquidity there is in the pool, the less slippage large orders may incur. That, in turn, may attract more volume to the platform, and so on.

To take this a bit further, let’s say you wanted to buy all the BSV in the BSV/USD pool on TokenSwap. Well, you couldn’t! You’d have to pay an exponentially higher and higher premium for each additional BSV, but still never could buy all of it from the pool. Why? It’s because of the formula x * y = k. If either x or y is zero, meaning there is zero BSV or USD in the pool, the equation doesn’t make sense anymore.