Auto Liquidity Acquisition
We understand that liquidity is crucial in any trading environment. By definition, decentralized liquidity is simply the accessibility of tokens operated and controlled by a smart contract--hosted by a decentralized exchange. Historically, market makers have been used to provide a service for buyers and sellers on traditional order book exchanges for a better user experience. The main function of these market maker services was to fill buy and sell orders promptly and reduce overall market volatility caused by large orders. However, traditional order books have long been outdated by newer technology, and have been replaced by liquidity pools in a decentralized venue. Just as market makers are compensated for providing a service in the order book environment, proper incentives for adding liquidity are a key factor in any decentralized environment. Problems arise when the liquidity pool provider loses the incentive to add tokens into the pool, which occurs after the token pair is subjected to impermanent loss resulting from arbitrage.
As a solution, Liquidity can be taken as a function of the smart contract using market activity from all swaps and transfers. A portion of these swaps and transfers will be captured by the smart contract and utilized. For this to happen, the portion of the 5% fee from swap and transfers can be kept in a standalone pool within the contract itself and automatically converted to the liquidity pool after the token count reaches a threshold. Liquidity is then managed by the contract as it is sold and paired accordingly thereby alleviating the users from having to subject themselves to any impermanent loss scenarios. Large liquidity pools act to decrease the volatility of the swap impacts against the overall available supply. Therefore, as the token matures, the auto-liquidity can be attributed toward an ever growing market stability capable of absorbing large market activity.
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