Below are some commonly used terms you'll encounter when using the Pact platform.
Also known as a liquidity pool (LP), is a mechanism in cryptocurrency markets where tokens are stored in a smart contract for the purpose of providing liquidity to a market.
Swapping refers to switching one coin or token for another.
Algorand Standard Assets (ASA) is the official naming convention for assets on the Algorand Blockchain. ASA's benefit from the same security, compatibility, speed and ease of use as the Algo token.
Liquidity is a measure of the ease at which an asset is able to be converted to another asset without affecting its price. The lower the liquidity, the higher the price impact will be. In simple terms, liquidity describes how quickly and easily an asset can be bought or sold.
Slippage refers to the difference between the expected price of a trade and the price at which the trade is executed.
When you sign the swap transaction, you agree to receive the exact amount of a chosen asset in exchange for an exact amount of the other one. Because market prices are always moving, a certain amount of slippage tolerance is needed to avoid swaps from failing. If the final execution price exceeds the tolerance you have set, the transaction will be automatically rejected.
Pact's default slippage tolerance is set as 0.5% and can be changed depending upon your preference. Typically, the larger your trade, or the more overall trading volume with the pool, the more the liquidity in the pool becomes imbalanced and creates price slippage.
Impermanent loss happens when you provide liquidity to a liquidity pool and the price of your deposited assets changes compared to when you deposited them.
The bigger this change is, the more you are exposed to impermanent loss. In this case, the loss means less dollar value at the time of withdrawal than at the time of deposit.
Pools that contain assets that remain in a relatively small price range will be less exposed to impermanent loss. Stablecoins or different wrapped (pegged) versions of a token, for example, will stay in a relatively contained price range.
Impermanent Loss (IL) is a risk associated with providing liquidity to an Automated Market Maker (AMM). As a result, the AMM compensates liquidity providers with fees generated from trades from the pool.