LP FAQ

What is a Liquidity Pool?

A liquidity pool is a sum of tokens that serves as a buffer or a reserve. These are the tokens users buy when they invest in the project. Without this pool, a user would have to wait for the necessary amount of tokens to be sold to get them. A liquidity pool provides an opportunity to buy instantly.

But pool doesn’t consist of just one token, instead, it matches the token with another one, forming a pair so that users would take a necessary amount of the first token and put back the equal sum in a different one. Which in turn, forms the token price.

Tokens are usually paired with a stablecoin or a coin native to the system they use. So it can be BNB, CAKE, or else.

A liquidity pool can be compared to an exchange reserve. And it’s needless to point out that this reserve is crucial to the project and the token. It has to be safe so that the investors would be confident in their choice.

Why is locking liquidity relevant?

Security is crucial to any crypto project, especially to a new one. It’s not just a question of prestige, it’s all about providing the best experience to your investors.

By locking liquidity a project can show that it’s planning to be in business for a long time.

It can make sure that no one from the team or the owner will at any point, as long as the liquidity is locked, take away the liquidity, leaving the pool empty.

How does it work?

Locking liquidity doesn’t mean relinquishing control of the pool, instead, it means using an external service to block the liquidity. As long as it’s locked, no one has access to it. It can’t be moved, spent, or rugpulled, and the unlocking works automatically at the date the owner sets beforehand. It’s impossible to unlock the liquidity sooner. The funds stay secured in one place.

Each project is locked in its own contract and doesn’t affect any others. So just because the other project has been unlocked doesn’t mean that anything could happen that yours will.

What’s a rugpull?

Rug pull is a malicious action performed by a team member or anyone who has access to the initial smart contract. Usually, it’s the owner. When users start buying the new token, they fill the liquidity pool with the stablecoin, the second coin in the pair that usually has a stable exchange rate. The pool presents value, and it’s an attractive option for any disreputable owner to take the stablecoin out of the pool and sell it, leaving the projects and its investors with a coin that’s virtually impossible to sell, i.e. pull the rug from under their feet.

This action is impossible to perform if the liquidity is locked.