Providing liquidity to constant function market makers & earning proportional exchange fees in return.
- Most exchanges maintain an order book and facilitate matches between buyers and sellers.
- For each successful match, traders are charged exchange fees which go directly to exchange operators.
- Smart contracts hold liquidity reserves of various tokens, and trades are executed directly against these reserves.
- Prices are set automatically using the constant product market maker mechanism, which keeps overall reserves in relative equilibrium.
- Reserves are pooled between a network of liquidity providers who supply the system with tokens and receive a proportional share of transaction fees accrued.
- IMPORTANT NOTE: With fluctuating prices, liquidity providers may incur “impermanent loss”.
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