Q1. What is Automated Market Maker(AMM)?

The automated market-making bot determines the swap price based on the ratio of the two tokens in the pool, and the trader will place an order at the price determined by the system. The use of algorithmic bots to simulate trading behaviour in the market and provide liquidity to the market is known as AMM(Automated Market Maker). Gate.io's AMM calculates transaction prices based on the Constant Product Market Maker Model (x*y=k) and thus provides continuous quotes for the market.

Q2. What is a liquidity pool?

Each market that supports AMM has a corresponding liquidity pool, and the liquidity pool will provide funds for automatic market makers. When trading, the product of both numbers of the two cryptocurrencies in the pool remains constant. Users can become market makers by providing liquidity for the pool, thereby obtaining dividends from AMM transactions within the pool according to their shares.

Q3: What does liquidity mining mean for providers and traders?

For liquidity providers, participating in liquidity mining means that they can use their idle assets to obtain income with very low risk. For traders, the waiting time for transactions is shortened by a large margin, and the larger the size of the liquidity pool, the smaller the slippage in the transactions.

Q4:How to add liquidity to a pool?

Click on "Trade" - “Spot" on the homepage bar to enter the spot trading page. After that, click "Liquidity Mining" on the right side of the candlestick chart. Click on "Add", input the sizes of both currencies on the pop-up "Add Liquidity" window, and click on "Add". The assets will be transferred from your spot account to your AMM account.

Q5: Are There Any Requirements for Adding Liquidity?

The amount to be added should be no less than 100 USDT.

Q6: How do I unlock liquidity?

Click on "Trade" - “Spot" on the homepage bar to enter the spot trading page. After that, click "Liquidity Mining" on the right side of the candlestick chart. Click on "Redeem". In the pop-up "Redeem" window, you can drag the slider to redeem the liquidity according to the percentage. The redeemed liquidity assets will be converted into the corresponding currency and returned to your spot account. The same trading pair can be redeemed one hour after it has been added successfully.

Q7. Are there any requirements for removing liquidity?

The same trading pair can be redeemed one hour after it has been added successfully.

Q8. What are the benefits of providing liquidity?

After users put assets into a pool, a commission from the automatic market making of the liquidity pool will be distributed to the liquidity provider according to the share. Assets can be put in or moved out of the pool at any time without handling fees.

Q9. What benefits can users get from participating in Gate.io Liquidity Mining?

Gate.io opens liquidity mining pools of different currencies and sets up reward pools for these currencies. Apart from handling fees, users who participate in reward pools can also receive additional rewards.

Q10. Where do the gains in liquidity mining come from?

Gate.io will pay the corresponding remuneration as income to liquidity providers. Different from decentralized trading platforms which give handling fees to liquidity providers and mortgage lending platforms which give loan interest to liquidity providers, Gate.io will distribute extra rewards to users who participate in liquidity mining in addition to the handling fees.

Q11. What are the risks for users to provide liquidity?

Impermanent losses can incur, which is the most common loss in liquidity mining and is usually unavoidable. Generally speaking, the revenue share provided by the trading platform to liquidity providers is usually much more than the impermanent loss. In addition, dissimilar to users of DeFi liquidity mining who also need to bear the security risks of DeFi projects, users who participate in liquidity mining at Gate.io do not have to worry about this.

Q12. What are impermanent losses?

The liquidity providers put assets into the liquidity pool of two different tokens. Violent price fluctuations will result in significant skew in the proportion of tokens in the liquidity pool, causing the number of one of the tokens to surge and the other to plummet. Since both the addition and redemption of liquidity are done on a ratio of 1:1, it is possible for the liquidity provider to encounter the fact that the amount of currency invested and the amount of currency withdrawn are different. Such a change in the number of coins and net asset value caused by fluctuations in market prices is called impermanent loss. It can also be regarded as the opportunity cost of participating in liquidity mining.

Example:

User A deposits 1 ETH and 100 DAI in the liquidity pool. In the corresponding automatic market maker (AMM) mechanism, the deposited two cryptocurrencies must be equal in value. This means that at the time of deposit, 1ETH = 100 DAI and the total asset value put into the pool is $200. Before user A's deposit, there is a total of 10 ETH and 1,000 DAI in the pool, which is contributed by other liquidity providers. Therefore, the total liquidity in the pool is $10,000, and user A has a 10% share of the pool.

Suppose the price of ETH rises to 400 DAI. In this case, arbitrage traders will add DAI to the pool and remove ETH from the pool until the ratio reflects the market price. While the liquidity in the pool remains the same at $10,000, the ratio of assets in the pool has changed.

If 1 ETH = 400 DAI, then the ratio of the amount of ETH to DAI in the pool has changed. There are now 5 ETH and 2,000 DAI in the liquidity pool due to the action of arbitrage traders.

If user A decides to withdraw funds, he/she can get back a 10% share. That's, he/she can withdraw 0.5 ETH and 200 DAI, a total of $400. User A has gained mega profits since he/she deposited $200 worth of tokens into the pool. But if user A does not add liquidity to the pool but just holds 1 ETH and 100 DAI, he/she can get $500. In such a case, holding the currency will benefit more than depositing the asset into the pool. This is what we call impermanent loss.

Note: The transaction fee is ignored in the above case for the convenience of calculation.

Q13. What is Automated Market Maker(AMM)?

The automated market-making bot determines the swap price based on the ratio of the two tokens in the pool, and the trader will place an order at the price determined by the system. The use of algorithmic bots to simulate trading behaviour in the market and provide liquidity to the market is known as AMM(Automated Market Maker). Gate.io's AMM calculates transaction prices based on the Constant Product Market Maker Model (x*y=k) and thus provides continuous quotes for the market.