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And decentralized exchanges have important meanings in the DeFi ecosystem. Uniswap is the most representative and successful decentralized exchange, and it provides liquidity using the Automated Market Maker (AMM) system. In the AMM system, the liquidity provider provides two tokens to the liquidity pool, and these two tokens are tied to smart contracts. Users utilize the liquidity of this pool to exchange tokens and pay a fee, which goes back to the liquidity provider.
Following the success of Uniswap, various protocols have emerged that give out self-issuing tokens to hold long-term liquidity providers in the liquidity pool. However, as the token price falls due to an increase in token circulation, the profits of liquidity providers also fall. Thus, liquidity providers seek alternative liquidity pools that provide higher interest rates and withdraw liquidity from the pool after only a short period of time. This has led to the critical risk of exhausted liquidity, so there have been concerns about how to lock liquidity in the liquidity pool for a longer period.
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IEEE/ICACT20230040 Slide.06
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