Liquidity Providers
MCF DEX will be a fork of Uniswap with focus on sidechain integrations, so supply of assets will be created by pools by Liquidity Providers. Whenever liquidity is deposited into a pool, unique tokens known as liquidity tokens are minted and sent to the provider’s address. These tokens represent a given liquidity provider’s contribution to a pool. The proportion of the pool’s liquidity provided determines the number of liquidity tokens the provider receives. If the provider is minting a new pool, the number of liquidity tokens they will receive will equal sqrt(x * y), where x and y represent the amount of each token provided.
Whenever a trade occurs, a 0.3% fee is charged to the transaction sender. 0.25% of the fee is distributed pro-rata to all LPs in the pool upon completion of the trade.
To retrieve the underlying liquidity, plus any fees accrued, liquidity providers must “burn” their liquidity tokens, effectively exchanging them for their portion of the liquidity pool, plus the proportional fee allocation.
As liquidity tokens are themselves tradable assets, liquidity providers may sell, transfer, or otherwise use their liquidity tokens in any way they see fit.
Impermanent Loss
In AMM-based swap protocols, slippage (a discrepancy between the expected price at the time of exchange and the actual price at the time of transaction) is possible. Furthermore, since token prices in pools are changed by an AMM process after the point of supply, a liquidity provider may experience Impermanent Loss (change in the price of deposited assets relative to when they are deposited).
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