Liquidity pools are an interesting vehicle in the blockchain world where one can create a sizable amount of gain or lose their shirt.
The Basic Concept
A liquidity pool makes it easier to trade between two types of asset or currency. In the case of blockchain tokens, an initial market starter sets up the pool with a beginning balance of two tokens, a pair. The amounts are equal to each other in value. Once set up, the market is then open for anyone to trade in it. The more people who add to the liquidity, staking their balances of the same coins, the more liquidity the pool has to make it easier to trade. Why do this? Pools add a benefit to the market by fronting the related coin in a swap for the trader while the exchange moves through the background in buys and sells. The trader gets their coins right away for a small fee, and the pool gets a profit. Those who invest in the pool can benefit from swap fees, as well as any farming added by the initial market-maker to entice more investment in the pool. Not all pools have farming, so it's important to understand how they are set up before getting into one.
Taco Pools
In the WAX Blockchain there are at least three opportunities for LP staking, but the two big ones are Taco and Alcor Exchange. Taco has been around longer and is easier to get started in. As a result, it tends to have more volume and active players in terms of everyday positions. Alcor is more technical and allows more exotic LP positions. Taco provides its LPs under MEAL, an example seen below:
Taco Pools cover pairs between all types of coins. The majority have some relationship to Taco tokens (Taco, Shing, ONI etc.). However, there are various pairings with WAX directly as well as between other coins.
For a user, there are two ways to find advantages in Taco pools: liquidity changes and farming. Liquidity changes happen when the value of one coin in a pair changes significantly versus the other. Ideally, the pool balances this out by shifting the ins and outs, so that there more of the lesser coin and less of the greater coin. So, to explain this by example, let's say we have a pair of PXJ to WAX. If WAX goes up in price, the WAX side will become less in number, and the PXJ side will become greater. Why? People are selling and unloading PXJ, so the pool is getting more PXJ. Vice versa, if WAX goes down, PXJ is decreasing and WAX is increasing for the same reason. Depending where one starts and what changes, one could, in theory, increase his position of a given coin, but he can also lose a lot quickly. This happens with LPs that have very high activity due to big possible reward gains in a short time window, and then the rewards cut off. Where do the rewards come from? Farming.
One difference Taco has from other LPs like Alcor is that they do not pay outright swap fees. Instead, the user gets only rewards and position changes. This can be a bit confusing at times when comparing to other swaps which provide both. However, Taco is far easier to get started in and practice with LPs before taking on a more complex environment like Alcor, for example.
Farming Versus Liquidity Alone
Farming, is a reward provided by a market maker daily for investment in a given LP. It can be in the form of NFTs or additional tokens. The tokens can be one or both of the pool coins or it can be an entirely different token. Many market makers use farming rewards to help boost a swap pair and draw pool activity. But there is a cost to the market maker since the reward has to be provide daily in some amount. Why do this? One, it grows the pool. Two, the market maker with the original stake could be receiving enough gain to pay for the cost and receive an ROI. Third, it's just being nice and helping a market get started.
In this example, Taco is provided farming rewards of Taco and Wax, in addition to LP movement.
Don't I Have to be a Whale?
Not true. Anyone can get started in a taco pool with just a few tokens. In fact, I've personally found it a great tool for accumulation of tokens where I'm earning more on what I have while I grind daily and add small packets. For example, I just liquidated 1 million NBMFUS earned from NFT Battleminers and switched it to WAX. The PXJ I had in that PXJ/NBMFUS pool I then moved to PXJ/WAX and staked into that LP for more earnings again. It's a strategy of aggregation. You're making the small tokens in your wallet generate growth until such time you can leverage that accumulation to the next level and move up from there. Wash, rinse, repeat.
Here's an example where I'm taking small rewards from NFT-selling on AtomicHub and using them to grow more WOMBAT while they sit in my possession.
Over time you will find you now have the ability to move tokens by the 1,000s of WAXP versus 100s or 10s. Patients and finding pools that offer growth are the key.
Impermanent Loss
It does need to be said that Taco pools, like any liquidity pool, have the risk of loss. If you stay in too long, as mentioned above, you may see your position pair turned into a singular, worthless amount. This is called an "Impermanent Loss." It can happen a lot with Taco pools that have crazy farming returns for a few weeks, and then suddenly everyone exits. Whoever remains is left holding the bag of a lot of worthless token left behind. This is why you need to watch your LP positions daily and find your best moment to exit. There's no perfect strategy for everyone. And this article is definitely not your financial advice either.
Do your own research. <<< ---- THIS!
NFT Offers
Some Taco LPs offer NFTs in addition to token rewards. PXJ/WAX for example, provides a chance to win a PixelJourney Token NFT worth anywhere from 2,000 to 100,000 PXJ as well as other NFTs now in it's pool reward account. And, the user still gets the token rewards of WAX and PXJ as well.
So, there's lots to find in Taco LPs. Do your homework, find one that fits your token patterns in your wallet, and make your crypto grow bigger.
NFA and DYOR
** Disclaimer - I am a community moderator on PixelJourney and proud to be part of its project team. Come join us and find out more about our Web 3.0 project!
