A Primer On Uniswap Liquidity Provider(LP) Tokens
Exchanges Need Liquidity
When it comes to exchanges, one of the most important things is making sure there is liquidity for traders. Without adequate liquidity, traders will see bigger spreads and prices that slip. In centralized exchanges, liquidity is provided by market makers(aka liquidity providers) who take on the role in filling buy and sell orders from both sides of the market in the order book. Decentralized exchanges take a different approach.
Uniswap is an automated market maker DEX
Uniswap solves the liquidity problem through a relatively new type of trading model called an automated liquidity protocol. In this protocol, each token listed has its own pool that users can contribute to, where a buyer or seller does not have to wait for an opposite party to appear to complete a trade. Instead, they can execute any trade instantly at a known price provided there’s enough liquidity in the particular pool to facilitate it. This works by incentivizing people trading on the exchange to become liquidity providers (LPs).
What are LP Tokens?
Anyone can become a liquidity provider (LP) for a pool by depositing an equivalent value of each underlying token in return for pool tokens. For example, if you’re looking to supply capital to the DAI/ETH market, and the current price of ETH is 1800 DAI, you must submit an equal amount of DAI and ETH, e.g. 2ETH/3600DAI to the pool. When liquidity is supplied, Uniswap grants users “liquidity tokens” which keep a record of how much of any given liquidity pool you are responsible for. Liquidity providers can redeem their liquidity tokens for the underlying collateral at any time.
Rewards For Putting Your Funds To Work
Why provide liquidity? Because Uniswap charges a fee on each transaction, and every LP holder earns some of this fee based on their amount of LP tokens. Check out Uniswap Docs to read more on roles and incentives for ecosystem participants.
A Uniswap Ecosystem Begins to Emerge
According to DeFi Pulse, Uniswap is currently the fourth largest DeFi protocol with over $4 Billion in total value locked (TVL). This basically translates to the amount of liquidity provided to the platform, and it means there are many providers holding LP tokens. The providers can of course hold the LP tokens and redeem them later, but there are already protocols providing tools to maximize profits. For example, they can stake LP tokens on Curve to earn CRV tokens as a reward — which makes their liquidity work double-time — earning fees and farming yields.
Impermax Adds Value
This is where Impermax comes in. Since LP tokens hold economic value from the yield they’re accruing, and the liquidity token they are redeemed for, Impermax creates a higher capital efficiency for the DeFi ecosystem by allowing users to borrow and lend other ERC-20 assets using LP tokens as collateral.
The New Industry Of LP Token Utilization: A Blue Ocean
LP token utilization is an untapped space with very few protocols enabling LP token holders to maximize their profits. Impermax is tackling this use case early on with a usable mainnet platform already. Learn more in the Introduction to Impermax Finance and check out the blog, use the platform and earn tokens as an early user.
