What happens when you add liquidity to a token?

Liquidity provision in decentralized finance (DeFi) protocols often involves a unique mechanism. When an individual or entity contributes funds to a liquidity pool, they are essentially enabling others to trade digital assets efficiently.

To incentivize this behavior, smart contracts are programmed to reward liquidity providers. This reward system ensures that participants are compensated for the risks they undertake by locking their assets in a pool.

Specifically, when someone adds liquidity, the smart contract interacts with the user. In exchange for the funds deposited, the contract mints and distributes new tokens to the contributor. These tokens represent their share of the pool and can later be redeemed for their proportional amount of assets plus any accumulated rewards.

It's worth noting that this token issuance in exchange for liquidity is distinct from swap transactions. In swaps, users exchange one asset for another without necessarily contributing to the pool or receiving new tokens.

BTCC, a leading cryptocurrency exchange, offers a suite of services that cater to various needs in the digital asset space. Among its offerings are spot trading, which allows users to buy and sell cryptocurrencies at current market prices, and futures trading, enabling Leveraged bets on future price movements.