Becoming a SWAY Liquidity Provider
Becoming a SWAY Liquidity Provider
Launching A New Game Currency
After years of development, we are proud to finally bring Influence, a fully onchain open-economy space strategy MMO, to production. As the game itself launches, the game’s new currency, SWAY, will also become available to trade. We intend for SWAY to be a semi-stable in-game currency token, utilized primarily for trading in-game products and assets within Influence itself. You can read more about SWAY’s tokenomics here.
An Economic Gateway to Influence
Importantly, SWAY is also an ERC20 token on Starknet, the L2 chain which hosts Influence, as well as L1 Ethereum. This means that it may be transferred and traded outside of the game for external assets, for example on a variety of decentralized exchanges (DEXes) on Starknet and Ethereum. As SWAY is traded for these external assets, volume on these DEXes will be created. There are several expected sources of volume for SWAY.
First and foremost, new players onboarding to Influence generally need to purchase a starting amount of SWAY so that they can then obtain starting goods in the game. Starting SWAY is sourced directly from Starknet DEXes.
Another source of volume comes from more established players who wish to accelerate their progress in the game by bringing additional external money into the game and using it in trade with other players for useful in-game assets. To be used for in-game trade, this external money needs to first be converted into SWAY, and this also occurs on DEXes.
A third source of volume is from players exiting their SWAY from the game. Players inevitably quit any game from time to time, and a key feature of Influence is that all assets used in the game are fully owned by the player and may be freely traded, allowing those assets to be liquidated for external money and without breaking any rules should the player choose. Additionally, without quitting the game, some players may choose to play Influence and earn SWAY from their fellow players, and then extract some of that value out of the game. In both cases, that exiting SWAY will need to be traded for other assets on DEXes.
Liquidity As a Foundation for Decentralized Exchanges
When users trade assets on DEXes, they have some amount of one token that they wish to swap into another token. But where does that other token come from in the trade? On the most popular type of DEX, the AMM (Automated Market Maker), it comes from a pool of tokens held by the DEX smart contracts, which have been sourced from market participants called liquidity providers or LPs. These LPs select a base/quote pair, and put tokens of one or both types into that pool. Then when users make trades, their starting tokens are placed into the pool, they receive the desired tokens from the pool, and the trade is successful. Without LPs, most DEXes cannot function. They literally make the market. In language that may be familiar to users of order book exchanges, if the user swapping their token is a market buyer or market seller, the LP is the corresponding limit seller or limit buyer, except the DEX automatically decides on the actual sale prices, rather than either of the participants.
DEXes usually collect a fee when they are used to execute a swap. This fee may come out of either the tokens the user was trading in, or the tokens they wished to receive, but in either case, it accrues to the LPs whose liquidity was used to execute the trade. By placing their capital into a pool, it is possible for LPs to earn income from these fees.
Providing Liquidity for Beginners
To become a liquidity provider, the first step is to select the token pair you wish to LP, and obtain some of one or both of those tokens. For example, if you wish to LP the ETH/SWAY pair, you will need either ETH, SWAY, or both.
With tokens in hand, you’ll next need to select your price range. This decision requires you to do your own research and to balance several factors, which are personal and individual to you. You will select a range that you expect the token pair to remain within for a reasonably long amount of time. This is a price range that the base token (the asset being valued) will trade in, in terms of the quote token (the asset the price of the base token is given in). You will accrue fees for every trade that occurs while the price is within this range; if it leaves the range, you will not accrue fees. However, another factor to consider is that the broader your range, the fewer fees you will earn for any given trade (please research the concept of “capital efficiency" for more information about this factor). Additionally, you should be aware that while you can pull out your liquidity and pick a new range, this action typically has a fee associated with it.
Finally, pick which DEX you wish to LP on, read the documentation carefully, select the fee you wish to collect (if applicable), and add your liquidity! Make sure you know how to retrieve your liquidity and any earned fees before you put it into the pool. The following is a short list of available DEXes. None of these exchanges are endorsed by UGI and, please, do your own research when selecting a DEX.
L2 Starknet:
L1 Ethereum:
Potential Risks When Providing Liquidity
While LPing can be a profitable endeavor, it also comes with its share of risks of which to be aware. The following is an incomplete, non-exhaustive, list of potential risks:
Scams. Make sure you are visiting the correct version of any webpage that you are planning to connect your wallet to and sign transactions or messages from. Don’t trust any third party resource, including this one, to provide you with correct links; always double check.
Smart contract risk. Decentralized exchanges are built from smart contracts, and smart contracts can have bugs that could lead to a loss of your funds. Use well-established, reputable DEXes to minimize this risk.
Gas fees. This is DeFi and every transaction comes with gas fees that will eat into your profit. This can be a significant concern if you are LPing on L1 Ethereum.
Taxes. Be aware of your local tax laws and how your DEX of choice functions. Some tax situations may make some DEXes preferable over others. Make sure to save enough out of your profits to pay your taxes.
Opportunity cost. LPing involves taking your capital and locking it in a pool, in exchange for possible fees that would represent a yield on that investment. Do you know of other opportunities where that same capital would earn more for similar or less risk? If so, you may be better off pursuing those other opportunities instead.
Impermanent loss / price divergence. When you provide liquidity, you are offering to be the counterparty for traders who may be more informed than you. When the market moves, you wind up with the tokens users who are swapping don’t want. This means that if the market ever moves out of the price range you set for your liquidity, you will have 100% of the less desirable token, i.e. the one that lost value against the other. The value of your liquidity in the pool in that situation will be less than the value of those token(s) when you first put them into the pool. In other words, fees aside, you would have been better off just holding those tokens and not putting them in the pool at all. This is called impermanent loss because if the market ever reverses course back to your starting point, you will make those losses back… at least until the market goes out of range in the other direction.
In Summation
We believe open economy games like Influence have tremendous potential, and we couldn’t be more excited to bring our own vision for this type of game out into the world! As we have always stated, our goal first and foremost, is to build a game, and our intention is for SWAY to be a semi-stable in-game currency token, utilized primarily for trading in-game products and assets within Influence itself. With a novel project like this, there are many opportunities, including providing liquidity for players. Please, always do your own research when considering economic opportunities!