Understanding Crypto Fundamentals by Thomas Jeegers

Author:Thomas Jeegers
Language: eng
Format: epub
ISBN: 9781484293096
Publisher: Apress

Figure 8-5Example of BTC-ETH liquidity pool with a relative price of 10 ETH/BTC where a liquidity provider gets 0.2% of the pool’s shares by contributing the corresponding quantity of BTC in proportion to the total pool’s value

Traders use the pool’s automated market maker (AMM) to swap one asset for the other, paying a fee for the service. Rewards to liquidity providers depend on how much volume traders swap in the corresponding pool. The higher the volume swapped, the higher the total fees and the higher the return for the liquidity providers. As of May 2023, the decentralized exchange Uniswap charges a fee of 0.3% of the swapped value, and the centralized exchange Binance charges a standard fee of 0.15% (with a 50% fee rebate, paid in Binance’s native coin, BNB).

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