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Liquidity Pools

Liquidity pools are the core of GO Swap. Each pool contains two tokens and enables trades between them using an automated pricing algorithm.

How Pools Work​

Pools follow the constant product formula:

x × y = k

Where:

  • x = reserve of token A
  • y = reserve of token B
  • k = constant liquidity invariant

Example:

If a pool has 1000 tokens A and 10 tokens B:

  • k = 1000 × 10 = 10,000
  • If someone buys 1 token B, they need to provide enough token A to maintain k
  • This automatically adjusts the price based on supply and demand

Price Discovery​

Prices adjust automatically based on trades:

  • Buy pressure → Price increases
  • Sell pressure → Price decreases
  • No orders needed → Prices are algorithmic

The current price is determined by the ratio of reserves:

Price of A in terms of B = Reserve(B) / Reserve(A)

Providing Liquidity​

Users can deposit token pairs into pools and receive LP tokens representing their share of the pool.

Benefits​

✅ Earn swap fees - Collect a portion of all trades

✅ Liquidity mining rewards (future)

✅ Support market depth - Enable larger trades with less slippage

✅ Flexible redemption - Remove liquidity anytime

How to Add Liquidity​

  1. Choose a token pair (e.g., GO/BNB)
  2. Deposit equal value of both tokens
  3. Receive LP tokens proportional to your contribution
  4. LP tokens represent your share of the pool

How to Remove Liquidity​

  1. Return your LP tokens to the pool
  2. Receive your proportional share of both tokens
  3. Your share includes accumulated trading fees

Impermanent Loss​

When providing liquidity, be aware of impermanent loss:

  • Occurs when token prices diverge from deposit ratio
  • Loss is "impermanent" because it can reverse if prices revert
  • Mitigated by trading fees earned over time

Example:

If you deposit 1 ETH + 2000 USDC, and ETH price doubles, your position will rebalance automatically. You'll have less ETH and more USDC than if you just held the tokens.

Trading Fees​

Each swap incurs a small fee (typically 0.3%) that goes to liquidity providers:

  • 0.25% to liquidity providers
  • 0.05% to protocol treasury (configurable)

Fees are automatically added to the pool, increasing the value of LP tokens over time.

Pool Creation​

Any user can create a new liquidity pool for any token pair:

  1. Select two tokens not yet paired
  2. Provide initial liquidity
  3. Set the initial price ratio
  4. Receive LP tokens for the new pool

Once created, others can add/remove liquidity or trade against the pool.