Liquidity Pools on Shido Network

Overview

The Shido network utilizes liquidity pools that function similarly to those in Uniswap V3. This allows users to provide liquidity for token pairs and earn fees from trades that occur within those pools. The following notes outline the key features and mechanics of liquidity pools on the Shido network.

Key Features

• Concentrated Liquidity: Liquidity providers (LPs) can concentrate their liquidity within specific price ranges, allowing for more efficient use of capital. This means that LPs can earn higher fees with less capital compared to traditional liquidity pools.

• Flexible Fee Tiers: The Shido network supports multiple fee tiers, enabling LPs to choose the fee structure that best suits their risk tolerance and market conditions. This flexibility allows for better compensation based on the volatility of the token pairs.

• Active Management: LPs have the ability to actively manage their positions by adjusting the price ranges in which their liquidity is active. This feature allows LPs to respond to market changes and optimize their returns.

• Impermanent Loss Mitigation: While impermanent loss is a risk in any automated market maker (AMM), the concentrated liquidity model in Uniswap V3 (and thus in Shido) can help mitigate this risk by allowing LPs to provide liquidity only within price ranges where they expect trades to occur.

Step-by-Step Process for Providing Liquidity

Step 1: Selecting Token Pair

Users begin by selecting the token pair they wish to provide liquidity for. The interface will display available pairs along with their current price ranges and fee tiers.

Step 2: Setting Price Range

LPs can specify the price range within which they want to provide liquidity. This allows them to concentrate their capital in the most active trading ranges, maximizing their fee earnings.

Step 3: Adding Liquidity

Once the price range is set, LPs can add liquidity by depositing the required amounts of both tokens in the pair. The DEX will calculate the equivalent amounts based on the current price.

Step 4: Earning Fees

As trades occur within the specified price range, LPs earn a portion of the trading fees generated by the pool. The fees are distributed proportionally based on the amount of liquidity provided.

Step 5: Withdrawing Liquidity

LPs can withdraw their liquidity at any time, along with any earned fees. The withdrawal process will return the tokens based on the current price and the amount of liquidity they provided.

Conclusion

The liquidity pools on the Shido network offer a powerful and flexible way for users to earn fees by providing liquidity, mirroring the successful mechanics of Uniswap V3. By leveraging concentrated liquidity and active management features, LPs can optimize their returns while participating in the decentralized finance ecosystem.