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Liquidity Pools

What Are Liquidity Pools?‚Äč

Liquidity Pools are a place to pool tokens (otherwise known as liquidity) so that users can use them to make trades in a decentralized and permissionless way. These pools are created by users and decentralized apps (or Dapps, for short) who want to profit from their usage. To pool liquidity, the amounts a user supplies must be equally divided between two coins: the primary token (sometimes called the quote token) and the base token (usually ETH or a stable coin).

SushiSwap's liquidity pools allow anyone to provide liquidity to them; when they do so, they will receive SLP tokens (SushiSwap Liquidity Provider tokens). If a user deposited $SUSHI and $ETH into a pool, they would receive SUSHI-ETH SLP tokens. These tokens represent a proportional share of the pooled assets, allowing a user to reclaim their funds at any point. Every time another user uses the pool to trade between $SUSHI and $ETH, a 0.3% fee is taken on the trade. 0.25% of that trade goes back to the LP pool.

The value of the SLP tokens, which represent the shares of the total liquidity each pool, is updated with each trade to add their value relative to the tokens the pool uses to trade. If previously there were 100 SLP tokens representing 100 $ETH and 100 $SUSHI, each token would be worth 1 $ETH & 1 $SUSHI (note in this example, $ETH and $SUSHI are the same relative value). If a user were then to trade 10 $ETH for 10 $SUSHI in that pool, and another user were to trade 10 $SUSHI for 10 $ETH, then there would now be 100.025 $ETH and 100.025 $SUSHI. This means each LP token would be worth 1.0025 $ETH and 1.00025 $SUSHI now when it is withdrawn.