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Liquidity Pools: How Do they Work?

Just like Uniswap, a person who adds money to a trade (called a liquidity provider) puts in equal parts of two types of tokens. Let’s say they put in 50% of Token A and 50% of IXS tokens, which in return gives them liquidity provider (LP) tokens. 

Basically, these LP tokens represent your share of the entire pool. When people trade tokens within the pool, you get a share of those trading fee because you contributed (provided liquidity) to the pool.

The size of the pool affects how the token prices behave. Basically, the larger the pool, the more stable the token prices become, making it harder for sudden changes. Every time someone makes a trade on the AMM, it changes the quantities and proportions of tokens in the pool and changes the tokens’ prices. If someone makes a really big trade, it can mess up this balance and make prices go crazy. To stop this, markets charge more for each bit of a type of token someone takes out. So, the less of a token there is in the pool, the higher the cost you have to pay.

It’s like having a group savings jar where everyone chips in different coins, and wherever someone wants to swap one coin for another, they can do it easily using the jar. And because you’re a part of the jar, you get a little bonus for helping out.But more importantly, liquidity pools are pivotal as they create automatic buy and sell orders, allowing users to trade their tokenized RWAs.

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Liquidity Pools: How Do they Work?
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