Each Tokenik liquidity pool is a trading venue for a pair of ERC20 tokens.
When a pool contract is created, its balances of each token are 0; in order for the pool to begin facilitating trades, someone must seed it with an initial deposit of each token. This first liquidity provider is the one who sets the initial price of the pool.
When other liquidity providers add to an existing pool, they must deposit pair tokens proportional to the current price. Whenever liquidity is deposited into a pool, unique tokens known as liquidity tokens are credited to the provider’s balance. These tokens represent a given liquidity provider’s contribution to a pool. The proportion of the pool’s liquidity provided determines the number of liquidity tokens the provider receives. The liquidity tokens are not being minted as actual tokens, they are only credited to the liquidity providers virtual balance on Tokenik.
Whenever a trade occurs, a 0.3% fee as well as a price impact value is charged to the transaction sender. This fee is distributed pro-rata to all LPs in the pool upon completion of the trade.
The constant product formula enhanced by Tokenik’s proprietary price impact algorithm, have the side effect (benefit) of generating higher trading fees for liquidity providers. Shortly put, the larger a trade is compared to the pair’s reserve balances, the higher fees that trade will generate for liquidity providers.
