Liquidity Pools

What Are Liquidity Pools?

Liquidity Pools are a place to pool tokens (otherwise known as liquidity) so that users can use them to make trades in a decentralized and permissionless 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 coins: the primary token (sometimes called the quote token) and the base token (usually SOL or a stable coin).

PPAISwap's liquidity pools allow anyone to provide liquidity to them; when they do so, they will receive LLP tokens (PPAISwap Liquidity Provider tokens). If a user deposited $PPAI and $SOL into a pool, they would receive PPAI-SOL LLP tokens. These tokens represent a proportional share of the pooled assets, allowing a user to reclaim their funds at any point. Every time another user uses the pool to trade between $PPAI and $SOL, a 0.3% fee is taken on the trade. 0.25% of that trade goes back to the LP pool.

The value of the LLP 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 LLP tokens representing 100 $SOL and 100 $PPAI, each token would be worth 1 $SOL for 1 $PPAI (note in this example,$SOL and $PPAI are the same relative value). If a user were then to trade 10 $SOL for 10 $PPAI in that pool, and another user were to trade 10 $PPAI for 10 $SOL, then there would now be 100.025 $SOL and 100.025 $PPAI. This means each LP token would be worth 1.0025 $SOL and 1.00025 $PPAI now when it is withdrawn.