Dig is ShibaSwap’s system for users to provide liquidity and earn rewards for doing so. Providing liquidity, in this case, is when a holder of a specific set of tokens pairs them to create a ShibaSwap Liquidity Pair (SSLP) and then farms them to earn BONE and other tokens, when applicable. Sometimes this is also called yield farming. For the liquidity provider, this can be a source of passive income. For ShibaSwap, this is the main way its liquidity is created. Every exchange needs liquidity in the tokens they offer for trade. Liquidity pools are used to facilitate decentralized trading, lending, and many more functions that ShibaSwap supports. This creates a system in which the investor can benefit from providing the exchange with liquidity and the exchange benefits by generating liquidity without having to go out and buy the assets themselves. While the term providing liquidity can also be used for staking on most exchanges, ShibaSwap does not lock up your staked tokens for a set amount of time. So, there is no liquidity provided to ShibaSwap when using the Bury function except for the 66% of BONE rewards that are locked away for 6 months. A simpler way to put this, on the investors side, is that Bury is ShibaSwap’s staking function and Dig is ShibaSwap’s token farming function.
Liquidity pools are essentially a large number of digital currencies locked into a smart contract. Similar to how each ERC20 token has its own smart contract, so do liquidity pools. A liquidity pool in the case of ShibaSwap, is made up of two specific assets. For example, BONE/ETH is a liquidity pool on ShibaSwap. The pair has its own smart contract, independent of each of the individual asset’s specific smart contracts. A liquidity pool will always be made up of a primary token and a base token. In most instances on ShibaSwap, the base token is ETH. The liquidity pools officially listed by ShibaSwap go by the name “WOOF Pools’. These pools have been created by the ShibaSwap team and include specific coding of the smart contracts to include additional rewards and/or reward multipliers. There are also generic liquidity pools on ShibaSwap. These were created by outside liquidity providers and do not come with additional benefits the WOOF Pools provide. A liquidity pair can be created between any two tokens, by anyone. These liquidity pairs do not earn BONE as a reward, though.
Any time you’re farming tokens, the rewards you receive will almost always be more than what you can earn simply staking your tokens. The reason for this is that there is an inherent risk involved in pairing two tokens together and farming them. Two tokens mean two separate market values; each of them moving independently of one another. Since the tokens have been paired, the token-to-token ratio must remain the same within the liquidity pool you are farming them in. Because of this, there is the potential to see a larger loss in profit depending on how each of the tokens moves in the market after you’ve started farming them. This loss in profit is also known as impermanent loss. This risk means an exchange must make it lucrative for investors to provide their liquidity to the exchange itself. If the rewards potentially earned aren’t high enough, liquidity providers may choose to take their tokens to another exchange or even to simply hold them. This risk is not present when staking your tokens on ShibaSwap using Bury. Another way people explain token farming rewards is through updating an old adage; “higher risk equals higher rewards”.
Impermanent loss is simply the difference in profit between using your tokens to provide liquidity or simply holding them. While this is the actual definition for impermanent loss, in the majority of the Shib communities the term is used to describe the tokens lost when separating your assets after farming them. This occurrence is one factor in determining your impermanent loss but, it is not impermanent loss itself.
Decentralized exchanges like ShibaSwap operate through the use of Automated Market Makers (AMM). Automated market makers allow digital assets to be traded in a permissionless and automatic way by using liquidity pools rather than a traditional market of buyers and sellers. When you use ShibaSwap to trade tokens or to farm tokens you have become part of this AMM process. This process involves the removal or addition of tokens into liquidity pools to maintain market value of tokens on the exchange. The process of removing or adding tokens to a liquidity pool to maintain a constant ratio based on price is called arbitraging. An arbitrager makes profit by taking the tokens removed from the liquidity pool and selling them on a different exchange. The price of individual tokens fluctuates so much that this process is almost constantly occurring. The profit made is usually very small so an arbitrager must do this many times. AMM users supply liquidity pools with crypto tokens, whose prices are determined by a constant mathematical formula. Arbitragers add and remove tokens from liquidity pools based on this formula. AMMs are disconnected from external markets. If token prices change on external markets, an AMM doesn’t automatically adjust its prices. It requires an arbitrager to come along and buy the underpriced asset or sell the overpriced asset until prices offered by the AMM match external markets. For DIG users, this means that you’ll end up with more of the token that decreased in value, and less of the token that increased in value when you remove your SSLP from its liquidity pool.
Basics-
First, we must take into account that all ShibaSwap Woof Pools are based on a 50:50 ratio. Meaning each of the assets must be added in a matching monetary amount. This could be $100 worth of Bone and $100 worth of ETH or, $104 worth of Bone and $104 worth of ETH. The two assets that are paired must be paired in an equal value. In order to keep things easier to understand, we will use a $100:$100 split in the BONE:ETH liquidity pool. We will also price BONE at $1.00 a token, and ETH at $100 a token. Another way of looking at this is that 100 BONE = 1 ETH.
Second, it's also important to understand that when you pair two tokens, you receive a SSLP. This SSLP is not only what you will use to farm the liquidity pool but, it also represents your overall percentage share of the ENTIRE liquidity pool.
Thirdly, a liquidity pool is measured by its total liquidity. This can be calculated by multiplying the amount of each asset within the entire pool. For our own example, we will say that the BONE:ETH pool contains 1,000 BONE and 10 ETH. This means total liquidity in the pool is 10,000.
Finally, when you create the SSLP, you no longer hold the two tokens you paired. Since the BONE:ETH SSLP has its own smart contract, the SSLP has now become the asset you hold. You have sent your previously held tokens to the SSLP contract and, in return, received the SSLP. The SSLP is its own asset.
Our percentage of the pool-