Liquidity Pool

Becoming a Liquidity Provider on DragonSwap

On DragonSwap, anyone can become a liquidity provider (LP) by contributing an equivalent value of each token in a pair to a specific pool. In return, contributors receive pool tokens that represent their share of the pool's total reserves. These pool tokens are proportional to the LP's contribution and can be redeemed for the underlying assets at any time, providing flexibility and liquidity to participants.

Automated Market Making and the Constant Product Formula

DragonSwap utilizes a pair-based automated market maker (AMM) system. Each pair operates continuously, ready to exchange one token for another, maintaining the "constant product" formula, succinctly expressed as $x×y=k$. This formula ensures that the product ($k$) of the reserve balances of a pair ($x$ and $y$) remains constant with each trade.

The constant product formula has a built-in mechanism that naturally adjusts prices based on the trade size relative to the pool's reserves. Essentially, larger trades (in proportion to the pool's size) are executed at less favorable rates than smaller ones.

Price Alignment and Arbitrage Opportunities

The pricing mechanism of DragonSwap is dynamic, with the relative price of paired assets changing solely through trading activity. Any discrepancy between DragonSwap's internal prices and those on external markets opens up arbitrage opportunities. Arbitrageurs can profit from these price differences, and their activity helps align DragonSwap's prices with the broader market, ensuring that the exchange rates on DragonSwap remain competitive and market-reflective.