$ETH
Today I read a question from a new market participant when joining the ETH/USDT pair liquidity pool to participate in the airdrop of a project:
👉 Why does the amount of WETH decrease when adding the WETH/USDT LP pair?
Here, many people participating in this market have heard of LP tokens, but most of you do not understand how LP tokens work. They only see the towering APY and APR, so they rush to add LP tokens to receive rewards. .
So I will tell you the easiest way to understand the above question.
Token LP (Liquidity Provider) is a type of token created when users provide liquidity to a trading pair on DeFi (Decentralized Finance) platforms. In the case of the ETH/USDT trading pair, LP tokens are created when a user provides both ETH and USDT into a liquidity pool for this trading pair.
When a DeFi project adds ETH/USDT trading pair liquidity, it offers the opportunity for users to provide ETH and USDT into that project's liquidity pool. As more users provide liquidity to this pool, the total number of LP tokens created also increases.
Suppose the price of ETH increases. At that time, the value of each LP token (valued by the ratio between ETH and USDT in the pool) also increases. However, the number of LP tokens does not increase proportionally to their value. Therefore, the number of ETH tokens in the pool compared to the total value of the pool will decrease.
In the opposite case, if the price of ETH decreases, the value of each LP token also decreases. At that time, the number of ETH tokens in the pool compared to the total value of the pool will increase.
In short, when the price of an asset in a liquidity pool increases, the ratio between assets in the pool changes, leading to a decrease in the number of ETH tokens in case the ETH price increases.
If you want to hear an explanation about any issue, please comment.
I will explain in my own way to help you understand as easily as possible. Many articles on the internet are quite general and difficult to understand.
