Last week, the first DEX (Decentralized Exchange) that is build on Tezos, was launched. More info about DEXter here.
Liquidity pools
As on any DEX, there are liquidity pools needed to provide the necessary liquidity. If people want to sell or buy, this should be possible at the moment they choose to do so. But if the a seller has to wait for a buyer to actually buy, the seller might need to wait for a buyer to show up at the time he wants to sell. To fill the gap, liquidity pools are needed who temporarily sell and buy tokens in anticipation of the market to sell and buy these tokens back and balance the pool back out. Liquidity pools are run by Automated Market Makers: smartcontracts designed to both anticipate on the market and predict the market and that way set the price without differing too much from the prices on other exchanges. This is common practice on DEXes nowadays.
So, liquidity pools are pools of tokens, that make sure trading on the exchange can happen without delay. As an incentive for people to add to the liquidity pool, anyone that adds liquidity, earns a share of the fees that traders pay for a trade. So the higher the trading volume, the more you earn.
Obviously, to reduce the risk as much as possible, the smartcontracts that run DEXter and the liquidity pools, need to be heavily tested and proven to work. DEXter has been audited by a third party: Trail of Bits. See the audit report here. On top of that, DEXters smartcontracts are proven to work as they are intended to, by use of formal verification. Formal verification is one of the unique selling points of Tezos' smartcontracts. "This specification has been formalized in the proof assistant Coq, and Dexter has been proven to satisfy it with a computer-checked proof. This ensures that there are no divergences between the specification and the implementation of Dexter."
From the moment DEXter launched, there was a healthy interest from people who wanted to participate in the liquidity pools. A day after launch. DEXters liquidity pools exceeded $100,000 in value.
Have your cake and eat it too
If you want to add liquidity to a pool, you will use XTZ that you can also use to earn stakingrewards with. So if you are going to direct that XTZ to a liquidity pool, you might need to consider whether or not you expect to earn a better return there, than while staking. Or should you? As the title of the article already reveals: you can have both. If you add your XTZ to a DEXter pool, this pool will earn stakingrewards for you. The pool is delegated to a baker and a special program was created that will transfer all stakingrewards directly to the addresses of the liquidity providers. So whatever profit you make as a liquidity provider on DEXter, it simply adds to the percentage you were already making through staking rewards.
This is something we will see more in future Tezos DeFi.
Connect with Ledger
Since yesterday, you can connect to DEXter while you have your funds stored on hardware wallet Ledger.
