Liquidity Pool LP Tokens & Security on Defibox DeFi EOS EOSIO
Order book? Nope. Lines and numbers that wiggle on the screen? No thanks! Fat-finger orders? Please, NO!
The new era of decentralized finance has begun! …on EOS too. Now we have Swap & Liquidity Pools. These two technologies are linked together to facilitate trading by providing to final users a single click experience.
In traditional exchanges there are entities called market makers that facilitate trading by always willing to buy or sell a particular asset, they provide liquidity, so the users can always trade and they don’t have to wait for another counterparty. In a new and evolved market of decentralized finance like the one in which Defibox is, the liquidity is provided via pools and the exchange between users is an instantaneous swap. Liquidity pools are pairs of tokens that are locked in a smart contract and managed by an algorithm to arrange buy or sell like a human market maker will do.
On Defibox, you can earn becoming a market maker, all you have to do is to set your own pool providing equal value for both tokens of your chosen pair. As people use it, you will earn a commission on it.
If a pool with the same pair already exists, your pool is automatically merged and the relative percent share on the total is considered.
Commissions are in form of a percentage of one of the two tokens of the pair, so, over time you will see your pool grow in value for both tokens if the market remains stable and there is a good volume of swaps.
What happens if the initial price of the tokens in the pool diverges from the current global market price? In that case the effect of buying or selling could throw off the balance on one side. Consider this example:
Let’s imagine depositing liquidity, both EOS + VIG. Both of those assets are equal in value at the time you contribute liquidity.
Scenario “VIG goes up in price”:
You are essentially selling your VIG for EOS
Which means you will have less VIG and more EOS
Scenario “VIG goes down in price”:
You are going to be buying VIG with your EOS
Which means you will have less EOS and more VIG
In both of these two scenarios the pool has been thrown off the balance. This is the so-called “Impermanent Loss”. This condition clears up by itself if the price returns as before. You still earn transaction fees but their positive effect is less noticeable.
Take a look here about Impermanent Loss: https://defibox.zendesk.com/hc/en-us/articles/900002435786-What-is-impermanent-loss
THE GOOD THINGS
From the market maker point of view, after carefully considering the risks of an unbalanced pool, you will quickly realize that stable pairs of tokens with high volume may provide a good source of gain. The more liquidity you add, the more you will collect in trading fees.
From the final user point of view, larger liquidity pools create better trading experience minimizing the difference between the expected price of a trade and the price at which the trade is executed, the so-called “slippage”.
It’s a win-win situation.
As aforementioned, if a pool with the same pair already exists, your pool is merged and the relative percent share on the total is considered as your contribution.
To give you a proof of ownership of that liquidity share the system issues a special token called LP, in proportion to how much liquidity you supplied to the pool. The fees are therefore distributed proportionally amongst all the LP token holders. At different liquidity pools correspond different LP tokens named following alphabetical sequence. To maintain an evident link with the original Defibox token, the root BOX was kept in the name, thus obtaining the tokens BOXA, BOXB, BOXC, BOXD… and so on, following the order in which the pools were created.
The creation of LP-bound tokens opens an innovative scenario: you can move pool ownership from one account to another without withdrawing or depositing tokens from/into any pool. The new EOS account that owns those LP tokens will receive the corresponding fees and will be able to freely withdraw the corresponding liquidity assets.
Take a look here: https://defibox.io/liquidity
This is an incredible innovation already but what will the future hold for us? Would we be able to lend our LP tokens and get additional rewards? That’s definitely a possibility… stay tuned!
Defibox is currently taking care of the development of the EOS Defi ecosystem. LP tokens are born with the goal to connect that ecosystem to the developers, also with the help of the funds made available by ‘Newdex seed’ and ‘Newdex Lab’. Check the announcement.
Like with everything in DeFi we have to deal with the risks like smart contract bugs, admin keys and systemic risks.
To mitigate these problems Defibox’s security solutions are designed to include: security audits, multi-signature contract, bug-bounty programs, and open source code. It upholds the principles of fairness and transparency, and puts the security of users’ assets first.
With Security Audits the Defibox’s smart contract solidity has been verified by security companies.
Check out audit report:
With Multi-signature smart contract, Defibox ensures a decentralized management, therefore, no Defibox Foundation employee will ever be able to steal user funds from the contract.
With Bug-Bounty and Open Source Code ( Defibox planning to fully open the source of contract code ) an active role of the community is ensured to help keep the smart contract free from possible security vulnerabilities and potential risks.
Check Bug Bounty program:
Defibox launches bug bounty program officially
Dear users, Hello! In order to optimize the Defibox protocol, further improve the stability of the Defibox platform…