Liquidity pools and Providing liquidity

Liquidity Pools on PacaSwap

Liquidity pools are the core of PacaSwap. They allow users to trade tokens without relying on the traditional order book model.

The Basics

A liquidity pool is a shared basket of two tokens. Users who contribute are called liquidity providers (LPs). LPs deposit equal values of both tokens into the pool, making them available for anyone to trade at any time.

Every trade through a pool generates a small fee. These fees are collected and distributed back to LPs as a reward. On PacaSwap, some pools may also receive extra $SWAP incentives to encourage deeper liquidity.

Why Liquidity Pools Matter

• Instant trades: Swaps execute automatically, no waiting for a buyer or seller.

• Always available: Liquidity is live 24/7, as long as tokens remain in the pool.

• Open to all: Anyone can become an LP and earn fees, not just professional market makers.

Risks to Understand

Providing liquidity isn’t risk-free. The main consideration is impermanent loss — a temporary reduction in value that happens when the price of one token in the pool moves compared to the other. Pools automatically rebalance, so when you withdraw, you may hold:

• More of the token that lost value

• Less of the token that gained value

Fees and incentives can reduce or offset this effect, but it’s important to understand before depositing funds.

Impermanent Loss (IL)

What it is

Impermanent loss occurs when token prices diverge. Because pools are designed to maintain balance, your share adjusts automatically, often leaving you with a different mix of tokens than you originally added.

Why “impermanent”?

• The loss only becomes real when you withdraw.

• If prices move back to the original ratio, the loss disappears.

• Trading fees and $SWAP rewards can help offset the impact, but not always entirely.

Example

Suppose you add $100 of DAG and $100 of USDC to a pool. If DAG doubles in price, the pool rebalances, giving you fewer DAG and more USDC. When you withdraw, your total balance may be worth less than if you had simply held both tokens.

The trade-off is that you earned swap fees (and possibly $SWAP incentives) during that time.

Incentives and Governance

$SWAP token holders can lock their tokens to vote on which pools receive additional rewards. This gives LPs a reason to participate in governance — locking $SWAP and supporting the pools they provide liquidity to increases the incentives they can capture.

Key Takeaways

• Liquidity pools make PacaSwap trading possible.

• LPs earn fees and, in some cases, $SWAP rewards.

• Impermanent loss is the main risk to understand.

• Governance matters: $SWAP holders decide where incentives flow.

By providing liquidity, you’re not only earning potential rewards, you’re also helping build the Constellation DeFi ecosystem.