I've read the official Tezos docs on liquidity baking. However these docs do not explain how the subsidy will be used, or what it's even for.
How will this subsidy be used, and how will liquidity providers benefit from the subsidy?
2 Answers
When liquidity providers deposit tez and tzBTC they receive a liquidity token in return and when they redeem liquidity tokens they receive back tez and tzBTC. The subsidy means they will receive more back than they put in, which you can think of as a "reward" for providing liquidity. See this question for the actual calculations: how to calculate the value of a single LQT token for Liquidity Baking?.
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1Hey Sophia! I'm honored to have my question answered by the engineer that implemented the feature. This is a fantastic answer and I appreciate the link to the official docs. Jul 30, 2021 at 2:08
In order for swap functionality to work, it must have funds. Instead of relying on regular users to send their tez to the LB pool, the Tezos protocol will now send 2.5 tez per block to this contract to generate the funding. Users can still send tez in exchange for LB rewards, but there's no guarantee people will, so modify the protocol to do it for you.
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so if alice adds liquidity to the CPMM, and leaves that liquidity in the CPMM for multiple blocks, do they get a portion of that subsidy? how does a liquidity provider benefit? It sounds like a liquidity provider would just add a certain amount of tez and tzbtc and then the subsidy would increase the price of tzBTC in the CPMM? Jul 28, 2021 at 22:14
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There's a fee associated with each swap; Those fees are shared back to the liquidity providers. (As I understand it) I suggest you read the many agora and blog posts on the subject.– utdrmac ♦Jul 29, 2021 at 3:55
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I would very much prefer to read official documentation over Agora posts, does any of that exist? Jul 29, 2021 at 9:34