Liquidity Provisioning in terms of crypto & Takaturn 2.0 explained
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are the entities or people who add buy and sell orders to financial markets in order to increase market liquidity. LPs help ensure that trades can be executed as planned and at the prices that the parties involved want to transact.
By providing liquidity to exchanges, these actors play an important role in ensuring that the cryptocurrency market continues to grow and thrive. In particular, LPs are instrumental in the following areas:
Facilitate smooth trading
Enhance price stability
Reduce price slippage
LP’s stake tokens into smart contracts to keep assets liquid and are remunerated significantly for it. Liquidity pools are found on , lending-borrowing protocols, and yield farms that allow users to exchange, borrow or stake cryptocurrency.
In terms of Takaturn 2.0 the collateral is deposited into a DEx liquidity pool with correlated pairs, example: ETH & wETH. Depending on how much ETH is deposited, our smart contract will now own a percentage share of all the assets in the liquidity pool (LP). In our example we have invested in a liquidity pool consisting of 2 assets, ie. ETH and wETH.
‘’ will want to swap ETH for wETH or vice versa. Each time a swap takes place, assets (ETH/wETH) are either added or subtracted from the LP. This changes the ratio of assets in the LP (i.e. there is either more ETH than wETH or vice versa), but doesn't change the total value of the assets. In addition, a fee is deducted from the amount that is supposed to be sent out for the swap, this fee is kept in the liquidity pool, increasing the total amount of assets in the liquidity pool.
The Takaturn 2.0 Collateral smart contract may withdraw a percentage of assets from the LP on demand and as required. The assets withdrawn for the given percentage would have increased, compared to when first deposited, due to the fees accrued. The amount withdrawn may now be composed of both ETH and wETH, depending on which transactions took place and what the prevailing balance of assets are in the LP.
To take a parallel real world example, a money changer has drawers full of different types of currency (USD$, Euros, AED, etc) in his office in case someone wants to exchange money. He has more cash on hand than he actually exchanges because he cannot predict which currency exchange transactions will happen. His investors provide this currency in the money exchangers drawers and in exchange they earn a portion of the fees the money changer gets for each exchange.
This is a high level overview of how yield generation through liquidity provisioning works. There is no lending involved and the returns are not fixed, but rather are based on how many swap transactions take place.
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