Liquidity Pools: An overview
Liquidity pools are an essential component in Decentralized Finance (DeFi) that allow for seamless executions of trades. Prior to the implementation of Automated Market-Making (AMM), Decentralized Exchanges (DEXs) operated on an incredibly inefficient order-book model which required counterparties to meet the opposite side of a trade. At the time, DEXs had a complicated interface with low liquidity which resulted in difficulties to execute trades. AMMs resolved the issue of low liquidity by providing liquidity providers incentives to supply these pools with tokens.
Why are liquidity pools important?
Low liquidity presents many downsides in efficient market making. In illiquid markets, slippage is the greatest concern that traders need to consider. Slippage is the difference the expected price of a trade against the actual executed price with slippage being most common in times of high volatility, low liquidity or when there is insufficient liquidity to meet a large order.
In a traditional order-book model, orders need to be met by a counterparty to execute the transaction. This model is inefficient in illiquid markets as the spread between buy and sell orders are too large for transactions to occur. Liquidity pools ensure that transactions are seamless as users do not need to wait for a counterparty to meet their order, only swapping a token for another token in the pool.
How do liquidity pools work?
Liquidity pools maintain the fair market price by deploying AMM algorithms which maintain the price relative to one another in a pair-to-pair pool. Typically, these pools use a product formula that keep the supply of tokens in a constant ratio.
Incentives in the form of crypto rewards or a percentage of transaction fees are awarded to liquidity providers to continue providing liquidity. When transaction occurs in a pool, a fractional fee is proportionally distributed to those that provide liquidity.
Governance Points
Infinex Governance Points (GP) were distributed to supporters through various channels including Discord and X (Twitter) activity, Governance Call Participation, Competitions, approved XIP authors and Farcaster campaigns totalling to a circulating supply of 137,184,576 GP. Governance Points allow users to exchange 200,000 GP for a Patron NFT through a burn mechanic.