There’s been a common misconception for how ShibaSwap creates liquidity for itself. Most people are under the impression that the Bone rewards that are locked away for 6 months are what is used for liquidity. This isn’t the case. Bone rewards being locked away has more to do with ensuring additional blocks can be efficiently created, as well as ensuring personal liquidity in Bone isn’t entirely removed prior to its entire supply being minted. But, that’s not what we’re here to talk about. I know SHIB attracts a lot of people new to crypto. Because of this, I feel like a cursory understanding of Dig, liquidity providers, AMM, and yield farming is important. For those that already understand what I’m about to say, please let me know if there’s anything I missed in the comments. Let’s get started.
1. What is Dig?
Dig is the “yield farming” function of ShibaSwap. Yield farming is a set of crypto investment strategies that holds out the hope of higher returns than most conventional investment opportunities. It can mean lending/borrowing, staking, or providing liquidity. In simple terms it means locking up your crypto to earn rewards. And in the case of ShibaSwap, this comes in the form of providing liquidity through the use of ShibaSwap Liquidity Pairs, or, SSLP’s.
2. What are SSLP’s?
SSLP’s are the tokens given to you when you pair two tokens together to provide liquidity on ShibaSwap. A list of existing Liquidity Pairs is provided on ShibaSwap. You can also find average reward return per day (based on $1,000) in Bone, liquidity provided per pair, and analytics for each pair. When creating a SSLP it’s important to understand you’ll need a matching supply in Fiat of both assets. So a $1,000 SHIB/BONE SSLP would consist of $500 in SHIB and $500 in BONE. There are a range of SSLP’s from BONE/WETH (avg 2.65 in Bone rewards per day per $1,000 SSLP) to ELON/WETH (avg 0.26 Bone rewards per day per $1,000 SSLP). When you create one of these pairs you become what’s known as a liquidity provider.
3. What is a Liquidity Provider?
A liquidity provider is any person that lends their tokens to a platform to help with decentralization of trading. In this case, Dig users are the liquidity providers, and ShibaSwap is the platform. What does that tell you? This is how ShibaSwap gets it’s liquidity. In return for providing liquidity you are rewarded with fees generated by trades (confined to the assets you paired) made on ShibaSwap, as well as receiving a percentage of Bone per block minted. Someone who stakes their tokens can also be considered a liquidity provider.
4. Rewards for providing liquidity on ShibaSwap.
I’m sure this is the real reason you’ve read this far but, stick with me, it’s about to get a whole lot more complicated after this. ShibaSwap calculates rewards like this…
Every time a user trades between any coin/token pair on ShibaSwap:
• a 0.30% Liquidity Provider Fee is taken on the trade. • 0.1% of the fees for that trade goes back to the $SHIB Staking/BURY Pool providers as $ETH
For all other trades, known as Allocated Swaps:
• 0.05% of the fees for that trade is converted to $SHIB and returned to $SHIB Staking/BURY Pool • 0.05% of the fees for that trade is converted to $LEASH and returned to $LEASH Staking/BURY Pool • 0.05% of the fees for that trade is converted to $BONE and returned to $BONE Staking/BURY Pool • The rest of the fees goes to the Liquidity pools and is distributed to each pool based on Allocation Points of that pool.
Bone token rewards for liquidity providers:
Since liquidity pools vary by pair, Bone token distribution is not a specific percentage per pool. Instead, ShibaSwap uses an Allocation Points (AP) system for determining Bone rewards for SSLP’s. AP’s are a measure of the share of Bone tokens obtained as a reward. The more AP in the pool, the more Bone emissions captured for that pool, the higher the potential return on investment. ShibaSwap allows anyone to provide liquidity by adding their assets to a pool to earn rewards. They include the following specifically named pre-made pools:
Puppy Pools Big Dog LP Pools Young Pup Pools Swap LP Pools Newborn Pup Pools
Here’s a breakdown of the AP’s for a few of the pools:
BONE/ETH (Puppy) – 3000 AP LEASH/ETH (Puppy) – 700 AP SHIB/ETH (Puppy) – 500 AP ETH/WBTC (Big Dog) – 300 AP LINK/ETH (Young Pup) – 100 AP UNI/ETH (Swap LP) – 300 AP XFUND/ETH (Newborn) – 50 AP ELON/ETH (Newborn) – 50 AP
You can find out how many SSLP tokens are in each pool by going to Bonefolio -> Woof Pools (All) -> SSLP you want to view. Current total AP for the Swap is 9130. There are calculators you can use for determining your Bone rewards in Dig located on the liquidity page for each liquidity pair. For a deeper look,
5. …Dive Deeper.
While most SSLP’s have analytics and calculators on the liquidity page dedicated to them, you can also scroll down on each pair’s page to find a button labeled “Dive Deeper”.
Bonefolio -> Pairs (All) -> pick the liquidity pair you’d like to view.
This will take you to intotheblock.com and allow you to take a much deeper look at each pair’s analytics.
6. Impermanent Loss explained…
Impermanent loss is the difference between holding an asset and staking them in an automated market maker based liquidity pool. Another way to put this is that impermanent loss refers to when the value of the tokens inside a liquidity pool diverges from the value of the same tokens outside of the pool. I’ve previously created a post explaining what Impermanent Loss means. I know we’re getting into novella range here so I’ll just include the link to that previous post.
7. Explaining liquidity, AMM, and arbitrage on ShibaSwap.
Now we’re cooking. Here comes the really fun (complicated) stuff. I’m going to make an effort to simplify this as best I can.
• How does ShibaSwap create liquidity?
If you couldn’t tell before, this is what everything before was leading up to. The main source of ShibaSwap’s liquidity comes from you, the liquidity provider. Or, more precisely, those of you using Dig. Basically every DEX that has a staked liquidity pair system also operates on this principle. The assets you add to the liquidity pools become liquidity for ShibaSwap. Meaning, this is what ShibaSwap uses to create a supply for swapping tokens. Having more liquidity on the Swap allows for less slippage for ShibaSwap users when trading tokens. So, how does this work?
• What is an automated market maker (AMM)?
Automated market makers are what make the decentralized exchange world go ‘round. Without them, we would have to rely on CEX’s and Limit Order exchanges to decide at what price we swap our tokens. So, what is an AMM? It’s simply a method in which assets can be traded in a permissionless and automatic way through the use of liquidity pools; rather than a traditional market of buyers and sellers. When you use DIG, you are essentially becoming a part of the AMM system. You supply liquidity pools with tokens, who’s prices are determined by a constant mathematical formula.
Token A balance * Token B balance = constant
This “constant” means there is a constant balance of assets that determines the price of tokens within a liquidity pool. So, if someone buys some of Token A on the Swap, that amount can be pulled from the liquidity pool. If there’s less of Token A, the amount of Token B must be increased to maintain “constant”. This also describes a simplified version of impermanent loss. So, how does this happen?
• The role of arbitragers.
An arbitrager is a person who takes advantage of the price difference of two or more markets; striking a combination of matching deals that capitalize on the imbalance. The advantage being the profit made between the difference between the market prices at which the unit is traded. Sounds complicated. Don’t worry, it is. But, for the purpose of this discussion, we’ll try to make it simpler to understand. Essentially, if tokens are bought/sold on ShibaSwap, they’re removed/added from/to the liquidity pool. When this happens, and the balance must be adjusted to equal “constant”, an arbitrager will add/remove tokens as needed to maintain the ratio of the liquidity pools. If Bone is bought, or increases in value, it must be removed from the BONE/ETH liquidity pool. Conversely, ETH can also be added to the liquidity pool. An arbitrager makes this happen, and turns a profit from doing it constantly.
8. Conclusions or confusions?
So, there we have it. Dig and ShibaSwap’s liquidity explained. I realize there are all kinds of underlying mathematical models to explain these concepts as well but, I don’t think they would be much help here. Having a basic understanding of how these systems interact with each other is a great stepping stone for jumping into the more complicated concepts. Of which, there are a multitude of articles and essays written by people many times smarter than me. I explained how the sausage is made. They can explain the ingredients and how to cook it. I’m not going to include a TLDR with this one. There’s no way to simplify these concepts, in my opinion. Wink, wink.
See y’all at the next level.