How Single Token LP Works
The first and most important thing to understand is that adding a single token to a dex is increasing its available liquidity. There is value in a single token!
When you add a single token as liquidity:
- ✅ If your token is traded back and forth (against other tokens) and it’s value doesn’t change too much. When you remove liquidity you will get back more because of the transaction fees. Example 100 XRD added. Lot's of trading over days, when removed 101 XRD is returned.
- ✴️ When you remove you token and get roughly the same back, it was probably because:
- It hasn't had a lot of traded volume vs other tokens
- It hasn't generated much of a transaction fee
- It drifted in value vs the other tokens in the Dexes pool
- ⛔️ If your token is traded but it primarily moves in one direction and doesn't make enough fees to compensate for the value change. When you remove your liquidity you will get back LESS of your token (than you put in). Example: You added 100 CAVIAR and the price moved a lot in a few hours vs XRD and when you removed 100% of the liquidity you got back 98 CAVIAR. This is Impermanent Loss in fact... this is Loss.
- In very rare cases where there is not enough of your token you added liquidity in, you’ll get the equivalent value made up by the risk tokens you paired with. For Non-XRD tokens this is always XRD
When adding Liquidity to CaviarSwap V2+ we ring fence your token into a pot and return you a liquidity token that represents your ownership of the contents of that specific pot.
As people take some of your token from the pot (you added liquidity to), they have to put something back in that is worth at least the same + fees. What they can put in your pot depends, but for NON-XRD token pots they can ONLY put in XRD so the risks of contamination with tokens you don't want, can't happen.
As more and more trades happen, CaviarSwap V2.2 Engine always tries to minimise the dilution of the pots and maximises the purity to keep everything tasty : )