What happens when adding liquidity on Domination Finance?
- DAI is used as collateral to sponsor (mint) synthetic tokens.
- Sponsoring tokens must occur at the Global Collateralization Ratio (GCR) or higher.
- For example, if the GCR is 200%, liquidity providers must lock at least 200 DAI to mint 100 DAI worth of synthetic tokens.
- Once the synthetic tokens are minted, they are then deposited to the respective Uniswap liquidity pool alongside an equivalent value of DAI.
- For the following example, assume GCR is 200% and the user is looking to add 300 DAI worth of liquidity:
- 200 DAI is locked in order to mint 100 DAI worth of synthetic tokens.
- The newly minted synthetic tokens are then deposited to the Uniswap pool alongside 100 DAI.
- Once the minted synthetic tokens and DAI are successfully deposited into the Uniswap pool, liquidity providers begin accumulating their share of trading fees.
- Uniswap charges a 0.3% fee on each trade. This fee is then split amongst all liquidity providers of that pool.
- All liquidity providers receive a Uniswap LP token. This LP token represents a share of the liquidity pool, which is then used to calculate how much of the 0.3% fee will be distributed to the liquidity provider.
Who should add liquidity on Domination Finance?
- Adding liquidity on Domination Finance is another way to prospectively generate yield.
- Initially, only DAI will be used as collateral to mint synthetic tokens AND deposited into Uniswap pools.
- In turn, yield on DAI is generated by LPs via accumulating trading fees.
Yield = Fees earned - Gas spent
- The fees earned are contingent on three factors:
- Liquidity pool size
- Share of the liquidity pool
- Volume of the trading pair
What are the risks of using Domination Finance?
- The sponsored position is liquidated. If a liquidation is successful, liquidity providers keep ALL of their BTCDOM tokens, however, they will no longer be able to redeem them for their collateral. Each position’s liquidation price is displayed whenever adding liquidity.
- Upon withdrawing liquidity from Uniswap, the sponsor may receive less synthetic tokens (BTCDOM) than when initially adding liquidity. This would require the sponsor to then market buy the difference in order to redeem all of their locked collateral. This phenomenon is known as impermanent loss.
- Given that Domination Finance is a non-custodial financial instrument and exchange, standard non-custodial risks apply. If a user forgets their password and/or loses the seed phrase for their web3 wallet, they will not be able to recover their funds.