Risks of Liquidity Providing
There's no free lunch
CaviarSwap is a centralised prototype and a proof of concept for swapping, staking and liquidity providing in tokens on the Radix ledger and is not a real decentralised working product. Any loss, damages, or liability resulting from the use of CaviarSwap is the sole responsibility of the user. CaviarSwap, Caviar Labs or the Caviar Team are not liable for any such loss, damages, or liability, whether direct or indirect, arising from the use of CaviarSwap.
We strongly recommend you read the full disclaimer here
As with all liquidity providing there are some risks which we will try and highlight here
In traditional inefficient pairwise liquidity providing, you own a percentage of the pool pair and your risks are when you remove your liquidity the value of the two tokens vs a base token is lower than you started with.
Equally the same comparison can be made with single token liquidity providing. The C2 Token you receive for adding liquidity represents your percentage share of that token's current utility or worth. Your risks when removing liquidity is that the tokens utility has gone down and/or that it hasn't earned enough fees to make up for it.
As a liquidity provider you are are adding token(s) in belief that the transaction fees over time will be greater than any Impermanent Loss (IL) you suffer verses the other token(s)
In pairwise LP this is simpler to understand because there are only 2 tokens and you are only going to get back those 2 tokens, but in an unknown ratio (which may be favourable or not).
In Single Token LP on CaviarSwap V2.2 there are so many possibilities that you can choose to maximise the value of your tokens 😀
When adding liquidity in non-xrd tokens like CAVIAR, OCI, FLOOP, FOTON etc.. you earn 80% of the transaction fees when your token is being utilised.
- If the value of your tokens pot is worth more when you remove liquidity, you will receive more of your token than you put in. Example you added 1000 CAVIAR, 1 month later removed all your liquidity and received 1010 CAVIAR
- If the value of your tokens pot is worth less when you decide to remove liquidity, you will simply receive less of your token. Example you added 1000 CAVIAR, 1 month later removed all your liquidity and received 990 CAVIAR. In very rare cases when there isn't enough of your token left, you will receive XRD totalling the exact value of what you are withdrawing similarly like in pairwise IL.
This pairing of your token with XRD can be seen on the UI. Example here with CAVIAR, where it says (CAVIAR, XRD)
This makes adding liquidity in non-XRD tokens VERY simple
👍
When adding liquidity in XRD you can pick the exposure to the other tokens you desire, which is very powerful
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Let's say we would like our XRD to be used against CAVIAR and FLOOP trading only and have no exposure to other tokens. Then we would simply pick the XRD pot that has those tokens. Example:
Now when we add our XRD to this pot we ONLY can be involved (and earn fees) in CAVIAR and FLOOP trades: XRD to FLOOP, XRD to CAVIAR, CAVIAR to FLOOP and the reverse of all of these.
This means we will NOT earn fees from trades in XRD to other tokens.
Like in section 1) above, when you add XRD to a pot and your pot is worth more, you'll get back more when you remove liquidity. When it's worth less, you'll get back less! In very rare cases when there isn't enough of your token left, you will receive the other tokens back in the pot you added to instead totalling the exact value of what you are withdrawing similarly like in pairwise IL. For example if you added XRD to the (XRD, CAVIAR, FLOOP) pot you could receive back FLOOP and CAVIAR
Easy! you can create it automatically:
Send your XRD (you want to add as liquidity) to the quantum wallet:
rdx1qspwzj0k5070mnkzcp89sqvyzrngn30cjrvhh56q5tggt48dwld0cgquantum
where the message is like the following:
add liquidity token1 token2 token3 .. tokenx
where token1, token2 etc are the tokens you want exposure to.
Example:
add liquidity rds vkc foton
This will mint you a new pot and return you your new liquidity tokens. The service costs 60XRD which will be taken from the XRD you send
Right so this might sound strange (or not) but the risk of:
- Adding liquidity in a pairwise DEX (in two tokens in the correct ratio)
Vs
- Adding liquidity in two tokens in a single liquidity in the correct price ratio
Is exactly the same risk!