Liquidity Pools & The Black Hole
Why THORChain will become the one market maker to rule them all.
Instead of limit-order books, THORChain uses continuous liquidity pools (CLP). The CLP is arguably one of the most important features of THORChain, with the following benefits:
- Provides “always-on” liquidity to all assets in its system.
- Allows users to trade assets at transparent, fair prices, without relying on centralized third-parties.
- Functions as source of trustless on-chain price feeds for internal and external use.
- Democratizes arbitrage opportunities.
- Allows pools prices to converge to true market prices.
- Collects fee revenue for liquidity providers in a fair way.
- Responds to fluctuating demands of liquidity.
Essentially, unbalanced pools represent a profit opportunity for arbitrage traders -- if a trader can purchase a token at a lower price on THORChain and sell it for a profit elsewhere, they will. These trades re-balance the pool, and ensure that prices accurately reflect the market value.
These pool balancing trades happen 24/7 via arbitrage bots interacting with the protocol's API directly. It's even possible to run an arbitrage bot of your own!
If you want to trade one asset for another, you need a buyer (you) and a seller (who?). Liquidity pools are a way for an exchange to maintain a pool of assets that can be swapped on demand.
Traditionally, with a CEX or 0x style exchange, trades require an orderbook of buy/asks at a specific price. Exchanges like UniSwap and THORChain utilize liquidity pools to provide more fluid access to trades.
Providing liquidity on THORChain creates an opportunity for holders of stagnant assets like BTC and BNB to earn a return. Liquidity Providers deposit their assets into pools. When other participants make swap assets and are charged fees, Liquidity Providers earn rewards. Liquidity Provider returns are affected by their share of the pool, the volume of swaps compared to the total value of the pool, fee size and something called Impermanent Loss.
THORChain is decentralized and community-owned, and therefore, all network profits are directly returned to node operators and liquidity providers. Slip-base fees are paid by traders and rewarded to THORChain network participants.
Early Participants in ChaosNet are seeing impressive returns.
- returns for LPs
- 10x higher returns than UniSwap
- No other exchange allows LPs to stake native BTC, ETH, ERC20, BEP2, etc.