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Botega’s liquidity pools enable seamless trading between two tokens by pooling assets from liquidity providers. Here's how they work and how liquidity providers benefit from participating in the pools.
Each liquidity pool on Botega consists of a pair of tokens, and it facilitates swaps between them.
Starting a New Pool: When a new liquidity pool is created, it starts with a zero balance for both tokens. The first liquidity provider seeds the pool by depositing both tokens, establishing the initial price ratio between them.
Maintaining Pool Balance: Once a pool is created, trades can be executed, and the pool's balance of each token fluctuates based on the trades being made.
When you deposit liquidity into a pool, you receive Liquidity Pool (LP) tokens. These tokens represent your share in the pool and come with several important attributes:
Minting LP Tokens: As soon as you provide liquidity, LP tokens are minted and sent to your wallet. These tokens signify your ownership of the pool.
Proportional Share: The number of LP tokens you receive is proportional to how much liquidity you contribute relative to the total pool size.
If you're the first to create the pool, you'll receive LP tokens based on the square root of the product of the two token amounts you deposit, ensuring fair representation of your initial liquidity contribution.
Naming Convention: Botega assigns a unique name to each pool's LP tokens based on the token pair. The naming format is: "Botega LP [TokenA Ticker]/[TokenB Ticker]". For example, adding liquidity to a qAR/USDC pool would generate LP tokens named "Botega LP qAR/USDC", making it easy to identify which tokens your LP tokens represent.
Whenever a trade occurs in a Botega liquidity pool, a 0.25% fee is charged. These fees directly benefit liquidity providers:
Fee Distribution: The fees collected from trades are distributed proportionally to all liquidity providers based on their share in the pool. The more liquidity you provide, the larger your portion of the fees.
Instant Accrual: Swap fees are immediately added back to the liquidity reserves, increasing the value of the pool and, by extension, the value of your LP tokens.
To claim your liquidity and the accrued fees, you must burn your LP tokens, which allows you to withdraw your share of the pool along with the earned fees.
At present, Botega does not take any platform fees from trades. All trading fees are distributed back to liquidity providers. However, this may change in the future as the platform evolves, but for now, 100% of fees go to LPs.
By participating in Botega liquidity pools, you can earn a share of the trading fees while contributing to a critical piece of decentralized trading infrastructure.