Author Topic: How to Profit From Bitshares’s AMM Liquidity Pool  (Read 388 times)

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Offline chigbolu

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How to Profit From Bitshares’s AMM Liquidity Pool
« on: December 14, 2020, 02:26:20 pm »
Bitshares Automated Market Marker Liquidity Pool (AMMLP) is the newest addition to a host of financial tools on the Bitshares DEX. The primary aim of the pool is to provide liquidity for an asset pair usually asset B via trade swaps with asset A, this is good for assets that have no real market liquidity (i.e very few trades) where quick swaps(trade) can be done to access the token probably at a better price than on the real market or to buy in large quantities than is possible on the market. The pool is usually created with three assets/tokens, Asset A, which is the base asset that will be used to fund the pool (or swap) and Asset B, which is the asset that is withdrawn (or taken out of the pool) and Asset C which is the Liquidity pool token (N/B the asset used as the fee pool token must be UIA and must have a zero supply; any asset that fit this criteria can be used).
Asset C can be viewed as a smart contract token because it can only be issued when liquidity is provided to the pool, it is given to liquidity providers who have staked both Asset A and B. The first issue of asset C is used to determine the price of the pool, this cannot be changed from there onwards unless the provider removes liquidity and returns asset C’s supply back to zero (This is a risk as anyone can determine the starting price of the pool, its best practice to immediately fund the pool after creation). This makes the first liquidity provider the pool manager (the creator of the pool), he sets the initial price of the pool and then manages it from there onwards.
Now to the important part, how to profit, profiting from the AMMLP depends on a number of factors;
i. The purpose/aim of the pool: As earlier said the primary purpose is to provide liquidity for asset B, this translates into other use cases like arbitrage trading, mining, fund generation, and smart contracts.
ii. Pool management: the pool is originally supposed to be managed by the creator, who in most cases is supposed to hold more of the LP token, but this is not always the case as pools can be created and left to market forces.
iii. Market conditions: This is another important factor as the market conditions of the three assets usually determines how best one can profit from the Pool. For example if Asset A is more valuable than Asset B, traders will prefer to provide liquidity than to swap for asset B and vise versa. Traders will also provide liquidity if Asset C is perceived to be more valuable than both A and B.
iv. Asset Pool fees: This last factor is not too important as it only favors the asset owners, however the supply of the LP token depends on Asset A and the taker fee percent initially set by the pool manager, while the maker fees affect the swap smaller fees allow for easier arbitrage/swaps.
It is also important to note that selling asset C passes the contract rights to the new owner. Asset C is dynamic and can be redeemed by anyone who holds the token whether they added liquidity or not, also the supply of Asset C depends on the amount of asset A in the pool.
Currently the most liquid Pool is the BTS/CNY pool which holds up to 1.57million bitshares… Bitsharescrude has also started its own BTS/CRUDE.NGN pool and plans to hold up to 1.25Million BTS in swaps by 2021.

Follow the link below to see how to setup a pool

https://github.com/bitsharescrude/CRUDE.BTSP/issues/1