Can someone explain to me how liqudity pools work?
Can someone explain to me how liqudity pools work?
Hey there, a token I’m interested in is about to launch via a liqudity pool. They are letting depositers get then their X-token split with their token and eth.
I’ve always heard of liqudity launch pools, but conceptually how do they work. I understand it’s meant to allow the pair to have liquidty to trade into. But can someone give me a more indepth answer of how they work and how the process is? Does it just share split 50/50 at the end? Is it basically partial buying the coin? How does a liqudity pool work?
Gihan Wijethunga Answered question August 26, 2024
I can try! It’s a little simplified.
- Let’s say 1 ETH = $1,000 and 1 MOON = $1 on most exchanges or pools (that means 1 ETH = 1000 MOONS)
- The ratio in the liquidity pool reflects the price. People put ETH and MOONS in there, but it has to be 1:1,000 ratio.
- Example: We have 100 ETH and 100,000 MOONS in the pool.
- now somebody swaps 1 ETH into MOONS
- He puts 1 ETH in there and takes 1000 MOONS out (that’s the ratio at the point)
- The pool now has 101 ETH and 99,000 MOONS. Moons have gotten more expensive! Now 1 ETH is 980 MOONS.
(usually, arbitrage bots take advantage of the new price and use other pools or exchanges to buy Moons and swap them in this pool until the pool ratio is at a realistic price level again)
Gihan Wijethunga Answered question August 26, 2024