★ What is liquidity pool

Text with one star ★ is recommended for experienced users. If you need a guide to basic operations on DEX, study this encyclopedia from the beginning.

A liquidity pool is a kind of "reservoir with cryptocurrencies", or more precisely — two scales, where an equal amount of tokens is on each side in terms of value. These liquidity pools are managed by DEX smart contracts: during a swap, the required amount of Token A is taken from one side of the scale, and the amount of tokens given by the trader, Token B, is placed on the other side. The liquidity pool ensures that transactions are executed as quickly and safely as possible: users do not need to wait for someone with the required amount of tokens — the assets are always available in the liquidity pool. Without funds in the liquidity pool, there would be nothing to trade.

Where do tokens come from in the liquidity pool?

They are deposited there by liquidity providers because it can be useful. Often, token creators, by adding their token to DEX for trading, themselves provide liquidity — otherwise, no one would be able to buy it. Trading is impossible without liquidity pools, and therefore, the operation of DEX itself. Liquidity providers earn income — they receive a percentage for each transaction within the pool. On STON.fi, this is 0.2% of the transaction amount. These 0.2% are distributed among all liquidity providers in proportion to their share in the pool (for example, whoever provided 50% of all liquidity will receive half of 0.2% of each transaction in that pair).

Can I also provide liquidity and receive a percentage of the fees?

Of course! We will talk about this in the following chapters. But remember that liquidity provision must be balanced on both sides of the scale — which means you will need to choose the right liquidity pool and acquire both tokens from the pair in the required volume.

We remind you that within this guide, we provide information in a simplified form, omitting some details and generalizing the principles of DEX operation.