Liquidity Provider System

10.1 Pool Architecture

Every AMM pool on SB Chain is a two-asset pool holding reserves of exactly two assets. Pools are permissionlessly accessible: any account may deposit into or withdraw from any pool at any time, subject to minimum deposit thresholds.

Pool state is tracked on-chain via liquidity_pool_object:

• balance_a: current reserve of asset A
• balance_b: current reserve of asset B
• virtual_value: the pool's constant k = balance_a × balance_b
• taker_fee_percent: the pool's fee rate
• share_asset: the LP token associated with this pool

The invariant virtual_value >= old_virtual_value is enforced after every swap; the pool's constant can only grow, reflecting taker fee accumulation.

10.2 LP Tokens

When a liquidity provider deposits into a pool, SB Chain mints LP tokens representing their proportional ownership of the pool at the time of deposit. LP tokens are pool-specific: each pool issues its own distinct LP token.

LP token quantity received on deposit is calculated proportionally to existing supply:

new_lp_tokens = (deposit_amount / current_pool_balance) × current_lp_supply

For the initial deposit into an empty pool, the LP token quantity is set by the depositor. Only the pool's owner (SwapBlok at launch) may make the initial deposit.

LP tokens appreciate in redemption value as taker fees accumulate in the pool. When an LP redeems their tokens, they receive:

asset_A_received = (lp_tokens_redeemed / total_lp_supply) × balance_a
asset_B_received = (lp_tokens_redeemed / total_lp_supply) × balance_b

Because balance_a and balance_b have grown due to fee accumulation, the LP receives more of both assets than they deposited; the difference is their accumulated fee income.

LP tokens are transferable. An LP can sell their pool position to another party without exiting the pool.

10.3 Two-Layer Reward Structure

SwapBlok's LP reward system provides two independent income streams simultaneously:

Layer 1: Native taker fees

Every swap through a pool contributes a taker fee that remains in the pool. This increases the pool's virtual_value and consequently the redemption value of LP tokens. No action is required from the LP; fees accumulate automatically and are realised when the LP redeems their tokens.

This form of income is denominated in the pool's native assets (wETH, wSOL, wBTC etc.), providing LPs with direct exposure to the assets they care about.

Layer 2: SBT emission rewards

SBT rewards are distributed to LPs from the dedicated 175,000,000-token LP rewards allocation, not from protocol fee revenue. The allocation is released on a front-loaded declining schedule over five years (40% in Year 1, declining to 5.7% in Year 5), with any unused annual allocation burned at year-end rather than rolled forward.

Rewards are distributed using a time-weighted average: SBT is allocated proportionally to how long liquidity was provided and how much liquidity was provided. An LP who provides more liquidity for longer receives a greater share of the emission for that period.

This creates a continuous SBT yield stream that:

• Does not require the LP to exit their position
• Is claimable at any time without disrupting pool participation
• Rewards commitment: longer and deeper liquidity provision earns a proportionally greater share
• Is independent of fee revenue, providing predictable yield from day one regardless of trading volume
• Runs in parallel with the buyback-and-burn mechanism, which operates separately from real fee revenue

Total LP income:

= Native taker fees        (realised on redemption, denominated in pool assets)
+ SBT emission rewards     (claimable continuously, from 175M allocation, time-weighted)

10.4 Impermanent Loss

Impermanent loss is the reduction in value an LP experiences relative to simply holding the deposited assets, caused by price divergence between the two assets in the pool.

Mechanism: When an LP deposits $10,000 of wETH and $10,000 of wSOL (1:1 by value), the pool is in equilibrium. If ETH's price doubles relative to SOL, arbitrageurs will buy wETH from the pool until the pool price matches the market, leaving the pool with less wETH and more wSOL than at deposit. If the LP exits at this point, the total value is less than if they had simply held wETH and wSOL separately.

The loss is "impermanent" because it reverses if the price ratio returns to the entry point. It becomes permanent on exit while prices are diverged.

Impermanent loss by price change magnitude:

LPs accept impermanent loss risk in exchange for taker fees and SBT rewards. Whether the trade-off is favourable depends on fee income relative to price divergence. Stablecoin pairs have minimal impermanent loss due to low price divergence.

10.5 LP Lifecycle

1.  Bridge assets to SB Chain (ETH → wETH, SOL → wSOL)
2.  Approve pool deposit transaction (co-sign with SwapBlok Wallet)
3.  Deposit wETH + wSOL in equal value
4.  Receive ETH-SOL-LP tokens
5.  [Position is active]
    ├── Native taker fees accumulate in pool (no action required)
    └── SBT rewards accrue (claimable at any time, Phase 2)
6.  Optionally claim SBT rewards without exiting position
7.  Redeem ETH-SOL-LP tokens
8.  Receive wETH + wSOL + accumulated taker fees
9.  Bridge out: wETH → ETH on Ethereum, wSOL → SOL on Solana

All steps (deposit, fee accumulation, reward claims, redemption, bridge withdrawal) are permanently recorded on SB Chain's immutable ledger.