Two-sided Liquidity Pools Explained

JewelSwap's system allows market makers to add liquidity on both buy and sell sides for the Automated Market Maker (AMM). Here's a simple breakdown of how it works:
  1. 1.
    Setting Up a Two-Sided Liquidity Pool
    • Market makers can create a pool that includes both buy and sell orders. For example, you could set up a pool with 10 orders to buy and 10 NFTs available to sell.
  2. 2.
    Customizing the Trading Fee
    • One of the key features of JewelSwap is that you, as the pool creator, can set your own trading fee. This fee is a percentage of each transaction that occurs in your pool, adding to your revenue as a liquidity provider.
  3. 3.
    Delta and Its Impact
    • A key feature is the 'delta,' which is set at a certain percentage or amount, say 5% or 0.1 EGLD. This delta affects how the price of NFTs changes in the pool.
    • If you set a higher delta, like 10% or 0.3 EGLD, there will be more significant price changes.
    • A lower delta, like 2% or 0.04 EGLD, means smaller price changes and potentially higher volumes.
    • A delta does not have to be exponential (percentage based) but can also be linear. In this case, you could set that buying or selling an NFT will change the pool's price by 0.1 EGLD.
  4. 4.
    Price Adjustment Mechanism
    • When an NFT is bought from your pool, the number of NFTs you provided in the pool have decreased, and the price for the next NFT buy order rises by your set delta value (e.g., 5% or 0.05 EGLD).
    • Conversely, when an NFT is sold into your pool, your number of NFTs increases, and the price for the next NFT buy order goes down by the delta value (e.g., 5% or 0.05 EGLD).
In the extreme case, you will end up being EGLD rich or NFT rich. This is also called Impermanent Loss.

Example of Setting Up and Managing a Two-Sided Liquidity Pool on JewelSwap:

Imagine you are a market maker on JewelSwap and you want to set up a two-sided liquidity pool with NFTs. Here's a step-by-step example:
  1. 1.
    Initial Setup:
    • You start by depositing (e.g.) 10 unique NFTs into the pool, each initially valued at 3 EGLD.
    • Alongside the NFTs, you also place buy orders for 10 more NFTs, setting up a balanced two-sided pool. Your pool contains 10 NFTs now (market value each at 3 EGLD) and the other side consists of 30 EGLD.
  2. 2.
    Setting the Delta and Trading Fee:
    • You decide on a delta exponential of, for example, 5%. This means after each buy or sell, the price of the next NFT will adjust by 5% (up or down, depending on buy or sell).
    • As the liquidity provider and pool creator, you also chose a 2% trading fee.
  3. 3.
    Trading Activity and Price Adjustments:
    • When a buyer purchases an NFT, the price for the next NFT would be 3 EGLD (spot price) + 0.15 EGLD (5% delta) + 0.063 EGLD (2% custom fee by pool creator) = 3.213 EGLD.
    • Conversely, if someone sells an NFT into your pool, your pool's NFT count increases, and the price for the next purchase order will decrease. The delta (price impact) of the sell has moved the purchase price to 2.85 EGLD. Since there is also a 2% fee on the pool, the actual purchase price would be 2.907 EGLD.
  4. 4.
    Ongoing Management:
    • As trades occur, you monitor the pool, adjusting the delta or adding/removing NFTs as needed to maintain liquidity and desired price levels.
  5. 5.
    Impact of Market Conditions:
    • If the market is bullish, and more users are buying NFTs, the price for NFTs in your pool might steadily increase, leading to a higher EGLD balance.
    • In a bearish market, with more users selling NFTs, you may accumulate more NFTs at gradually lower prices.