# Liquidity Pools

Published 2022-04-18

# What are Liquidity Pools?

Liquidity pools are pools of tokens that are locked in a smart contract. They are used to facilitate trading by providing liquidity and are extensively used by decentralized exchanges.

# How do Liquidity Pools Work?

Exchanges are based on order book models. In this order book model, buyers and sellers come together and place their orders. Buyers (Bidders) try to get in at the lowest price possible. Sellers try to sell at the highest price possible. For the sale to occur, the buyer and seller must converge and find a common ground that they agree upon. If no one can place their product at a fair price or there is not enough of a supply; that is where market makers come into play.

Market makers are entities that facilitate trading and allow for the ability to always buy or sell an asset. By doing that, they provide liquidity so that users can always trade and do not have to wait for another counterparty to show up.

In its basic form, an LP holds two tokens that creates a new market for those two pairs. When a new pool is created; the first liquidity provider is the one who sets the initial price of the assets in the pool, they are incentivized to supply an equal value of both tokens in the pool. If the initial price of the tokens in the pool diverges from the current global market price it creates an arbitrage opportunity, which can result in lost capital for the LP. LP Tokens are generated proportionally based on distribution.

# Liquidity Pool Tokens

When you add your tokens into a Liquidity Pool pairing, you will receive "Liquidity Provider" (LP) tokens and share in the trading fees that are gained through the transactional volume on our DEX.

As an example: If you deposit both $CROS and $CRO into a Liquidity Pool, you will receive "CROS-CRO LP" Tokens.

The number of LP tokens that you receive is a representation based on the portion of the CROS-CRO Liquidity Pool that you own.

You may also redeem your funds at any time by removing the liquidity that you initially provided.

# Liquidity Provider Earnings

When providing liquidity, you receive a reward in the form of trading fees when people are using your liquidity pool.

When making a token swap (trade) on our exchange at the base fee tier, traders will pay a 0.16% trading fee, of which 0.10% is added into the Liquidity Pool of the swap pairing that is being traded on.

For Example:

  • 10 LP Tokens are representing 10 CROS and 10 CRO Tokens.
    • 1 LP token = 1 CROS + 1 CRO.
  • Someone trades 10 CROS for 10 CRO.
  • Someone else trades 10 CRO for 10 CROS.
  • The CROS/CRO LP now has 10.01 CROS and 10.01 CRO.
    • Each LP token is now worth 1.0001 CROS + 1.0001 CRO.

An additional feature that we have that allows you to earn more rewards for your LP tokens, on top of the pre-existing 0.1% trading fee, is our Yield Farms.