How Liquidity Pools Work
When a user deposits a proportional value of the required tokens into a pool, they become a Liquidity Provider (LP). This action is fundamental to the system’s operation as it deepens the available liquidity, reducing price slippage for traders. In return for their contribution, LPs receive LP tokens. These LP tokens are representations of an LP’s pro-rata share of the pool’s total assets. These tokens algorithmically entitle the holder to a portion of the trading fees generated by the pool and serve as the mechanism for redeeming their underlying deposited assets.Pool Types
Mezo offers two distinct types of pools, optimized for different use cases:Volatile Pools
Designed for asset pairs with uncorrelated prices, like BTC and MUSD. These pools use standard constant product market maker formulas.
Stable Pools
Engineered for assets with highly correlated values, like MUSD and USDC. These use a specialized formula to provide much lower slippage for trades between like-assets.
Understanding LP Tokens
When you deposit assets into a Mezo Pool, the contract mints and sends you LP tokens. These are standard ERC20 tokens that quantify your proportional ownership of the pool’s total reserves. The number of LP tokens you receive is based on your share of the pool. For the very first deposit in a new pool, this amount is calculated assqrt(x * y), where x and y are the quantities of the two tokens deposited.
How Fees Work
For every swap executed through the pool, a trading fee (e.g., 0.30% in volatile pools) is charged on the input asset. This fee is instantly segregated into a separate contract, which is claimable by liquidity providers for that specific pool. To reclaim your share of the underlying assets, you must “burn” your LP tokens; however, you can claim your fees anytime. When you claim your initially deposited assets, your LP tokens are returned to the smart contract in exchange for your pro-rata share of the two tokens in the pool.The Mezo Pools Advantage
The Mezo protocol was designed without relying on traditional financial structures like order books. While order books are effective in centralized finance, they present significant challenges in a decentralized setting. Mezo Pools are engineered specifically for a decentralized environment, leveraging the unique strengths of blockchain technology:Autonomous and Permissionless
Each pool is an open-access smart contract. Any user or application can permissionlessly interact with it by calling functions like swap() to trade or mint() to provide liquidity.
Advanced Capabilities
Mezo Pool functions as an on-chain TWAP (Time-Weighted Average Price) oracle, providing manipulation-resistant price data. They also support flash loans for complex DeFi strategies.
Gauges and Emissions
Gauges determine how emissions are distributed across pools. Each pool has an associated gauge, and emissions are recalculated each epoch (7 days) based on veBTC holder votes. Pools with higher gauge votes receive more emissions, attracting more liquidity, which reduces slippage and increases trading volume. Higher volume generates more fees for LPs, creating a positive feedback loop across the ecosystem and aligning interests of LPs, voters, and traders.Getting Started with Mezo Pools
Prepare Your Assets
To provide liquidity, you’ll need an equal value of both assets in a pair (e.g.,
$50 of BTC and $50 of MUSD).- Need MUSD? Mint it using your BTC on Mezo Borrow.
- Need other assets or MUSD? Use Mezo Pools to trade for them.
Add Liquidity
- Navigate to the Pools page on Mezo Explore
- Select your desired pool
- Specify the amount you wish to deposit
- Confirm the transaction
- You will receive LP tokens in your wallet, representing your share of the pool
Stake & Earn (Coming Soon)
Once staking is live, return to the Pools page, select your position, and stake your LP tokens to start earning more rewards.
Deposit and Manage Positions
Depositing Liquidity
To provide liquidity, you need equal value of both assets in a trading pair. For a BTC/MUSD pool, you might deposit 50 worth of MUSD. Visit mezo.org/earn/liquidity-pools and select your desired pool. Enter the amount of one token you wish to deposit—the interface automatically calculates the required amount of the second token. Review your estimated LP tokens, confirm the transaction, and approve token spending if it’s your first time. Once complete, LP tokens representing your proportional share are minted to your wallet.What You Earn
You earn from two sources as an LP:Trading Fees
Trading Fees
- Volatile Pools: 0.30% per swap
- Stable Pools: 0.05% per swap
- Collected in both tokens of the pair
- Stored separately in PoolFees contracts
- Claimable anytime without unstaking
MEZO Emissions (When Staked)
MEZO Emissions (When Staked)
Earned based on veBTC holder votes on gauges. Distribution amounts determined by community governance.
Claiming Rewards
Claiming fees: Navigate to your position, click “Claim Fees,” and both tokens are sent to your wallet. You can claim fees without unstaking your LP tokens. Claiming Rewards: Click “Claim Rewards” from your staked position to receive your earned incentives.Withdrawing Liquidity
Your LP tokens are returned to your wallet and stop earning emissions, but trading fees continue to accrue.Risks
Impermanent Loss
Impermanent Loss
Providing liquidity exposes you to impermanent loss—when the price ratio between your tokens changes, you may have less value than simply holding both tokens. Volatile Pools like BTC/MUSD carry higher impermanent loss risk than Stable Pools like MUSD/USDC.
Smart Contract Risk
Smart Contract Risk
Mezo Pools are audited, but smart contracts always carry inherent risk. Review audits at mezo.org/audits and only deposit amounts you’re comfortable with.