Liquidity Providing
Investors can participate as liquidity providers on TWIN.
Last updated
Investors can participate as liquidity providers on TWIN.
Last updated
In exchange for contributing TWIN asset tokens or TWIN Finance protocol tokens in combination with USD stable coins to the market pool, liquidity providers are rewarded with LP Tokens. Each market pool is uniquely associated with its own LP token, which cannot be merged with LP tokens from other pools with the same underlying asset. LP tokens primarily serve as a unit of account, representing the liquidity provider's stake in the pool. The proportion of LP tokens held in relation to the total LP tokens in a pool reflects the share of TWIN assets or USD stable coins that can be claimed upon liquidity withdrawal.
It's important to note that pools for short and long tokens based on the same underlying asset are distinct from each other. Therefore, each underlying asset is associated with two separate pools.
Users can provide liquidity by depositing tokens into both sides of a TWIN market pool (TWIN assets and USD stable coins). This action results in the creation of LP tokens specific to that pool, which can then be used to withdraw TWIN assets or USD stable coins from the pool.
When considering the quantities of USD stable coins and asset tokens (or TWIN) being deposited, the current contents of the pool before the deposit, and the existing supply of LP tokens, the calculation for the number of newly minted LP tokens is as follows:
While liquidity providers have the flexibility to deposit any amount for both tokens, their motivation lies in maintaining a balance where the value is equal on both sides, factoring in the market price of the asset token or TWIN token. Deviating from this equilibrium would expose them to potential losses by enabling arbitrage opportunities against the pool. In such cases, the LP tokens they receive may not suffice to recover the liquidity they initially provided.
Users have the option to burn their LP tokens to reclaim their initially deposited liquidity. The pool will then return a combination of USD stablecoins and TWIN asset tokens (or TWIN), the exact amounts contingent on the quantity of LP tokens being burned. The specific formulas for determining these amounts are detailed below.
When removing liquidity, it's highly likely that the amounts retrieved by burning LP tokens will differ from the initially deposited quantities. This discrepancy can arise due to several factors, including price fluctuations of asset tokens/TWIN, shifts in your proportional share of the liquidity pool, and more.
LP Commission Rewards
Holders of LP tokens are entitled to a share of the rewards generated from the pool's trading fees, distributed proportionally based on their total LP token holdings. A portion of these rewards, either in the form of TWIN asset tokens/TWIN Finance protocol token or USD stablecoins (depending on the trade direction), is reinjected into the pool as the LP Commission. As these trading fee rewards are reinvested in the pool, they can only be accessed by burning LP tokens and withdrawing liquidity.
Ensuring ample liquidity in the market pools is essential for investors to buy and sell assets with minimal impact on prices. To incentivize users to provide liquidity to individual market pools, amongst other LP/pool incentives, the TWIN Finance protocol may also offer TWIN token rewards to Liquidity Providers.