Doubt about Liquidity

General
1

Hi, I understood the basic concepts about ERC20 and what it concerns. But I have some doubts about the concept of liquidity, and liquidity pool.
So, if I want to deploy an ERC20 token, I have to provide liquidity (so I have to pay a lot of money) in order to allow exchanges. Is it correct?

but it seems strange to me, because, how can I provide so much liquidity? Every existing token did this? it would be an incredible expense, I think.

thanks to anyone who can clarify my doubts ^^

2

I think if you want to swap token, you can add liquidity in a decentralized exchanges, for example, you can add the liquidity of Your_Token and ETH in the Uniswap, then users can buy and sell. Or you can use the centralized exchanges, but you need to set the price of the orders.

3

Yes, but for example in Uniswap, I have have to provide liquidity just for setting the price or I have to spend much more? Sometimes tokens have millions of dollars of liquidity…but where all this liquidity comes from?

4

The first one who add liquidity will decide the price, eg: if you add 100 Your_Token and 10 ETH to the uniswap, that means 1 Your_Token almost is equal to 0.1 ETH, but actually, you can not swap 1 Your_Token to get 0.1 ETH, cause the volume is too small, so it will have a large slippage, so in order to keep a low slippage, expect to add large liquidity, so the liquidity can be millions of dollars.

And you can find some articles about uniswap to learn more.

Have I made myself clear?

1 Like
5

Thanks, you are helping me understand a lot of things.

So, is it possible to release a token, and providing it a small quantity of ETH (the equivalent of 20$ for example) or would that be too small?
Another question: as people trade, does liquidity increase?

6

Yes, you can, but you should be noticed that, if the volume is small, when swap tokens, the slippage will be large.

Emmmm, I am not sure, cause the amount of one token decreases and the amount of the other one increases, so does liquidity increase? maybe, cause the protocol will charge some fee.

7

for uniswap you will need to provide quite a lot of ETH in order to keep the LP going. if you only had $20 someone would come along and just buy all of it, so yes you do need to provide quite a lot up front. Some people have suggested min $10k for a LP to be of any use.

8

I'm very curious how the successful defi protocols or token get initial liquidity. I have seen a few options

  1. Presale token on dxsale
  2. Self fund a pool on uni/sushiswap
  3. Pay crazy APY to stake (OlympusDAO, many staking/farming defi)

What is the most effective way to raise large liquidity for a new defi protocol project or token?