A liquidity pool is a smart contract holding two assets that users can swap between. The assets are deposited by liquidity providers, people who lock their tokens in the contract in exchange for a share of the fees every swap generates.
When someone swaps Token A for Token B on a DEX like Ston.fi they are not trading against another person. They are trading against the pool. The pool always provides a price using a formula based on the current ratio of the two assets. Buy Token A and the ratio shifts, Token A becomes more expensive, Token B becomes cheaper. The formula does this automatically with every trade.
Liquidity providers earn because every swap pays a fee. On Ston.fi that fee is 0.2% of the swap amount. That 0.2% distributes to everyone providing liquidity in the pool proportional to their share. If you own 1% of the pool's total liquidity you earn 1% of every fee generated.
The catch is impermanent loss. When the price ratio between the two assets in your pool changes the pool automatically rebalances against you accumulating more of the declining asset and less of the appreciating one. When you withdraw your position reflects that rebalanced ratio rather than what you deposited. The difference between what you would have held and what you actually hold is impermanent loss.
Whether providing liquidity is profitable depends on whether the fees earned exceed the impermanent loss accumulated over the holding period. Pools with high trading volume relative to their total liquidity generate more fees per dollar deployed. Stable pairs where the price ratio rarely changes produce less impermanent loss.
Reading both numbers together before entering any pool is the starting point for evaluating whether the position makes sense.
Explore STONfi pools โ https://app.ston.fi/pools
$BTC #BTC Price Analysis# #Meme Alpha# $SOL
When someone swaps Token A for Token B on a DEX like Ston.fi they are not trading against another person. They are trading against the pool. The pool always provides a price using a formula based on the current ratio of the two assets. Buy Token A and the ratio shifts, Token A becomes more expensive, Token B becomes cheaper. The formula does this automatically with every trade.
Liquidity providers earn because every swap pays a fee. On Ston.fi that fee is 0.2% of the swap amount. That 0.2% distributes to everyone providing liquidity in the pool proportional to their share. If you own 1% of the pool's total liquidity you earn 1% of every fee generated.
The catch is impermanent loss. When the price ratio between the two assets in your pool changes the pool automatically rebalances against you accumulating more of the declining asset and less of the appreciating one. When you withdraw your position reflects that rebalanced ratio rather than what you deposited. The difference between what you would have held and what you actually hold is impermanent loss.
Whether providing liquidity is profitable depends on whether the fees earned exceed the impermanent loss accumulated over the holding period. Pools with high trading volume relative to their total liquidity generate more fees per dollar deployed. Stable pairs where the price ratio rarely changes produce less impermanent loss.
Reading both numbers together before entering any pool is the starting point for evaluating whether the position makes sense.
Explore STONfi pools โ https://app.ston.fi/pools
$BTC #BTC Price Analysis# #Meme Alpha# $SOL
