How Casperswap Works

Each Casperswap smart contract (or pair) manages a liquidity pool made up of reserves of two CEP-18 tokens.

Anyone can become a liquidity provider (LP) for a pool by depositing an equivalent value of each underlying token in return for pool tokens. These tokens track pro-rata LP shares of the total reserves, and can be redeemed for the underlying assets at any time.

Pairs act as automated market makers, and readily accept one token for the other as long as the “constant product” formula is preserved. This formula, most simply expressed as x * y = k, states that trades must not change the product (k) of a pair’s reserve balances (x and y).

Given that k remains unchanged from the reference frame of a trade, it is often referred to as the invariant.

This formula has the desirable property of having larger trades (relative to reserves) execute at exponentially worse rates than smaller ones.

In practice, Casperswap applies a .25% fee to trades, which is added to reserves. As a result, each trade actually increases k. This serves as a payout to LPs, which is realized when they burn their pool tokens to withdraw their portion of total reserves. In the future, a .01-.05% fee may be included once the developer address is added.

Because the relative price of the two pair assets can only be modified through trading, divergences between the Uniswap price and external prices create arbitrage opportunities. This mechanism ensures that Casperswap prices always trend toward the market-clearing price.