Liquidity Market
How the liquidity market operates on Kodo
All tokens need liquidity on AMM dexes. Having more liquidity for a token:
Allows people to trade more of it without incurring a high price impact
Provides utility for tokens; holders will buy and hold tokens for gains from providing liquidity
Liquidity providers add liquidity by depositing equal values of two tokens (one of which is usually a stable or ETH) into a liquidity pool. Doing so carries impermanent loss risk, where big price changes make depositors recoup less value than what they’d have had if they’d just held the tokens. So they need to be highly compensated to take on this risk. The thinking is, will the rewards make me better off than I think I risk losing from impermanent loss?
Kodo rewards liquidity providers solely through KODO emissions. KODO emitted to a liquidity pool is distributed proportionally. If I provide more of the liquidity in an LP, I get more KODO as rewards.
Kodo distributes a programmed amount of KODO to liquidity providers across all liquidity pools. How much KODO goes to each liquidity pool changes by a weekly vote. Voters are veKODO holders — people who have acquired KODO and locked it to receive a veKODO NFT, which gives them votes to distribute to pools.
Voters have several potential reasons to vote for specific pools and increase compensation for liquidity providers to those pools. They might:
want to get more liquidity for specific tokens for the benefits mentioned above;
themselves be liquidity providers on those pools and want to gain more for providing liquidity;
want to get more direct rewards for their vote.
The third reason, direct rewards, is the most common one. Kodo rewards votes in two ways: fees and incentives.
Fees: Kodo charges trading fees; when someone swaps tokens from a liquidity pool, some of the tokens they trade are distributed to voters for that pool. More trade volume translates to more fees distributed to voters, so voters are incentivized to vote for pools they think will be highly used.
Incentives: Anybody can incentivize votes for a specific pool by depositing tokens to be distributed to voters on that pool. Their thinking is: if I pay voters for voting on that pool, I’ll get more votes on that pool and thus more KODO emitted to that pool, which means more liquidity for tokens on that pool. And then these tokens get the benefits mentioned at the top: more trading, more (and larger) participants, more token utility.
Note: Voters can add incentives for pools they’re voting on. They recoup some of their incentives by voting on that pool, and they incentivize others to join in with them in voting for that pool. Liquidity providers also can and add incentives for pools they’re providing liquidity to, as historically that pool gets a multiple of the incentive value back in KODO emissions; they may receive more value than they send as an incentive.
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