Pools

Introduction

Each Sonus 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. They are incentivized to deposit an equal value of both tokens into the pool. To see why, consider the case where the first liquidity provider deposits tokens at a ratio different from the current market rate. This immediately creates a profitable arbitrage opportunity, which is likely to be taken by an external party.

When other liquidity providers add to an existing pool, they must deposit pair tokens proportional to the current price. If they don’t, the liquidity they added is at risk of being arbitraged as well. If they believe the current price is not correct, they may arbitrage it to the level they desire, and add liquidity at that price.

Pool tokens

Whenever liquidity is deposited into a pool, unique tokens known as liquidity tokens are minted and sent to the provider's address. 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. If the provider is minting a new pool, the number of liquidity tokens they will receive will equal sqrt(x * y), where x and y represent the amount of each token provided.

Whenever a trade occurs, a 0.3% fee is charged to the transaction sender. This fee is distributed pro-rata to all LPs in the pool upon completion of the trade.

To retrieve the underlying liquidity, plus any fees accrued, liquidity providers must "burn" their liquidity tokens, effectively exchanging them for their portion of the liquidity pool, plus the proportional fee allocation.

As liquidity tokens are themselves tradable assets, liquidity providers may sell, transfer, or otherwise use their liquidity tokens in any way they see fit.