V2 Liquidity

V2 Liquidity, the base of AMM

Overview

In DeFi, V2 liquidity is a system where people (liquidity providers) deposit two tokens of the same value, like ETH and USDC, into a "pool." This pool allows others to trade those tokens without needing a centralized exchange.

How it works

• Trading Formula: A simple formula (x * y = k) keeps the pool balanced. When someone trades, the token prices change automatically based on supply and demand.

• Rewards for Providers: Liquidity providers earn a small fee (e.g., 0.3% for every trade) as a reward. In return, they get LP tokens, which show their share of the pool.

• Risk of Impermanent Loss: Providers may lose potential profits if token prices change a lot while their tokens are in the pool.

• Token Pairs: Each pool is set for one trading pair (e.g., ETH/DAI), and they operate separately.

• Use in Other Protocols: LP tokens can also be used in other DeFi apps, like yield farming, staking, lending, or trading.

When to use V2 liquidity

• For Traders: Use V2 pools to trade tokens quickly and easily, with prices that update automatically based on supply and demand.

• For Providers: Consider providing liquidity if you want to earn passive income through trading fees and are okay with the risk of impermanent loss.

• For DeFi Users: Use the LP tokens in other DeFi activities, like staking or borrowing, to maximize returns.

Fee

Refer V2 fee at Trading Fee.