Detailed Instructions

To start a liquidity pool, a user called a Liquidity Provider (LP) must deposit an equal value of two different tokens into a smart contract. This initial deposit sets the pool's exchange rate. For example, to create an ETH/USDC pool, you might deposit 1 ETH and 2,000 USDC, assuming a market price of $2,000 per ETH. The contract then mints and sends LP tokens to the provider, representing their share of the pool. These tokens are a receipt and can be burned later to reclaim the underlying assets.

• Sub-step 1: Approve Token Spending: Interact with each token's contract to allow the AMM contract to move your funds.
• Sub-step 2: Call the addLiquidity Function: On a DEX like Uniswap V2, you would call this function on the router contract (e.g., 0x7a250d5630B4cF539739dF2C5dAcb4c659F2488D).
• Sub-step 3: Specify Amounts and Deadline: Provide the exact amounts of each token you wish to deposit and a transaction deadline to prevent pending transactions.

Tip: The initial ratio you deposit becomes the starting price. Impermanent loss risk begins immediately if the token prices diverge.

Detailed Instructions

Most AMMs, like Uniswap, use the Constant Product Formula (x * y = k). Here, x and y are the reserves of two tokens in the pool, and k is a constant that must remain unchanged during a trade. This formula ensures liquidity is always available at some price, but it causes price slippage. The price of Token A in terms of Token B is simply the ratio of the reserves (Price = y / x). When a trader swaps 1 ETH for USDC, the pool's ETH reserve increases and its USDC reserve decreases, raising the ETH price for the next trader.

• Sub-step 1: Calculate Output: For a swap, the formula determines the output. If swapping Δx of Token A, the output Δy is calculated as: k / (x + Δx) - y.
• Sub-step 2: Apply Fee: A 0.3% fee is typically deducted from the input amount before the swap, which is added to the reserves, incrementally increasing k and rewarding LPs.
• Sub-step 3: Execute Swap: The trader's transaction calls the swapExactTokensForTokens function on the router.

Tip: The larger the pool (liquidity), the lower the slippage for a given trade size. Always check the pool's depth before trading.

Detailed Instructions

A trader initiates a swap by sending a transaction to the AMM's router contract. The trader specifies the exact input amount, the minimum output they will accept (to protect against front-running), a path of token addresses, and a deadline. The router finds the best path across multiple pools if needed. The core logic happens in the pool contract, which uses the constant product formula to calculate the output amount, transfers the input tokens from the trader, and sends the output tokens to the trader's wallet. All swaps are non-custodial; the trader never gives up control of their funds to a central entity.

• Sub-step 1: Construct the Transaction: Using a wallet like MetaMask, you would call a function such as swapExactETHForTokens on the Uniswap V2 router.
• Sub-step 2: Set Parameters: For example: swapExactETHForTokens(amountOutMin, [WETH_ADDRESS, USDC_ADDRESS], msg.sender, deadline).
• Sub-step 3: Pay the Gas Fee and Sign: The transaction requires ETH for gas. The router automatically wraps native ETH to WETH for the swap.

codeCopy
// Example call data for swapping 1 ETH for USDC on Uniswap V2
// amountOutMin is calculated off-chain to allow for slippage
router.swapExactETHForTokens{value: 1 ether}(
    1900, // minimum USDC out (example)
    [0xC02aaA39b223FE8D0A0e5C4F27eAD9083C756Cc2, 0xA0b86991c6218b36c1d19D4a2e9Eb0cE3606eB48],
    msg.sender,
    block.timestamp + 300 // 5 minute deadline
);

Tip: Always set a reasonable amountOutMin (e.g., 0.5% slippage) and a short deadline to protect your transaction from unfavorable market moves.

Detailed Instructions

Liquidity Providers earn a 0.3% fee on every trade, proportional to their share of the pool. These fees are automatically added to the pool's reserves, increasing the value of each LP token over time. To claim fees, an LP must withdraw their liquidity by burning their LP tokens. However, LPs are exposed to impermanent loss (IL), which occurs when the price ratio of the deposited tokens changes compared to when they were deposited. IL is the difference between the value of the LP position and the value of simply holding the tokens. Providers must actively manage their positions across different pools and protocols to optimize returns.

• Sub-step 1: Track Your Position: Use a dashboard like DeBank or Zapper to monitor your LP token value, accrued fees, and estimated impermanent loss.
• Sub-step 2: Remove Liquidity: Call the removeLiquidity function on the router, specifying the LP token amount, minimum amounts of each underlying token you'll accept, and a deadline.
• Sub-step 3: Stake LP Tokens (Optional): On many platforms, you can stake your LP tokens in a farm (e.g., SushiSwap's MasterChef contract at 0xc2EdaD668740f1aA35E4D8f227fB8E17dcA888Cd) to earn additional governance token rewards.

Tip: Impermanent loss becomes permanent when you withdraw. It is most significant for volatile token pairs. Stablecoin pairs (e.g., USDC/USDT) experience minimal IL.

Detailed Instructions

Automated Market Makers (AMMs) are smart contracts that hold liquidity pools, enabling users to trade tokens without a traditional order book. A liquidity pool is a shared pot of two or more tokens locked in a smart contract. The price of tokens within a pool is determined by a mathematical formula, most commonly the Constant Product Formula (x * y = k), where x and y are the reserves of two tokens, and k is a constant. This ensures liquidity is always available, with prices adjusting automatically based on supply and demand.

• Sub-step 1: Analyze the Pool Pair: A typical pool pairs two assets, like ETH/USDC. The total value locked (TVL) in the pool determines its depth and slippage.
• Sub-step 2: Understand Impermanent Loss: This is the temporary loss of value compared to holding assets outside the pool, occurring when the price ratio of the paired tokens changes.
• Sub-step 3: Review the Fee Structure: Liquidity providers (LPs) earn a percentage (e.g., 0.3% on Uniswap V2) from every trade executed against their pooled assets.

Tip: The security of your funds depends entirely on the audited smart contract, such as the Uniswap V2 factory at 0x5C69bEe701ef814a2B6a3EDD4B1652CB9cc5aA6f.

Detailed Instructions

You must first ensure you have a Web3 wallet (like MetaMask) connected to the correct blockchain network (e.g., Ethereum Mainnet, Arbitrum, Polygon). You need to hold the specific token pair you intend to supply, in the correct ratio as determined by the current pool price. For a 50/50 ETH/DAI pool, if 1 ETH = 2000 DAI, you would need to provide equal value of each, e.g., 1 ETH and 2000 DAI.

• Sub-step 1: Fund Your Wallet: Acquire the base assets. You might swap for them on a DEX or transfer from a centralized exchange.
• Sub-step 2: Approve Token Spending: Before depositing, you must grant the pool's smart contract permission to access your tokens. This is done via an approve transaction for each token.

javascriptCopy
// Example ERC-20 approve transaction for DAI token
await daiContract.methods.approve(
  '0x7a250d5630B4cF539739dF2C5dAcb4c659F2488D', // Uniswap V2 Router address
  '1000000000000000000000' // Amount in wei (1000 DAI)
).send({ from: userAddress });

• Sub-step 3: Verify Balances and Network Fees: Ensure you have enough of the native token (e.g., ETH for gas) to pay for the approval and liquidity addition transactions.

Tip: Always double-check contract addresses from official sources to avoid scams. The Uniswap V2 Router is a common, verified entry point.

Detailed Instructions

This step involves interacting directly with the DEX's interface or smart contract to deposit your token pair. You will receive liquidity provider tokens (LP tokens) in return, which represent your share of the pool. These LP tokens are ERC-20 tokens themselves and are your proof of ownership and claim on the pool's underlying assets and accrued fees.

• Sub-step 1: Navigate to the 'Add Liquidity' Page: On a front-end like app.uniswap.org, select the two tokens and input the desired amount for one; the interface will calculate the required amount of the other.
• Sub-step 2: Review the Quote: The interface shows the pool share percentage you will receive, the current exchange rate, and a preview of potential impermanent loss.
• Sub-step 3: Confirm the Transaction: Sign the addLiquidity transaction in your wallet. This calls the router contract which handles the deposit.

solidityCopy
// Simplified view of the core Router function call
router.addLiquidity(
  address tokenA,
  address tokenB,
  uint amountADesired,
  uint amountBDesired,
  uint amountAMin, // Slippage tolerance for tokenA
  uint amountBMin, // Slippage tolerance for tokenB
  address to,      // Your address to receive LP tokens
  uint deadline    // Transaction validity timestamp
);

Tip: Set sensible slippage tolerances (e.g., 0.5%) to protect yourself from front-running bots and price movements during transaction confirmation.

Detailed Instructions

After depositing, your capital is at work. Trading fees (e.g., 0.3% per swap) are automatically added to the pool, increasing the value of the underlying assets and thus the value of your LP tokens. You can track your position's value, accrued fees, and impermanent loss through portfolio dashboards like DeBank or Zapper. To realize your earnings, you must remove liquidity, which burns your LP tokens and returns your share of the two pooled assets plus your portion of the accumulated fees.

• Sub-step 1: Monitor Pool Health: Regularly check the pool's TVL, volume, and the price ratio of your assets. Significant divergence increases impermanent loss.
• Sub-step 2: Stake LP Tokens for Extra Rewards (Optional): Many protocols offer liquidity mining programs. You can stake your LP tokens in a farm (e.g., on SushiSwap's MasterChef contract at 0xc2EdaD668740f1aA35E4D8f227fB8E17dcA888Cd) to earn additional governance or reward tokens.
• Sub-step 3: Removing Liquidity: Navigate to the 'Remove Liquidity' section, select the amount of LP tokens to burn, and confirm the transaction. You will receive both tokens back based on the current pool ratio.

Tip: The fees you earn are not automatically sent to your wallet; they are compounded into the pool. You only claim them by removing some or all of your liquidity.