HTX DAO's Liquidity Pledge Explained

"Liquidity pledge" is an innovative token management strategy introduced by HTX DAO. Unlike directly burning tokens, pledging liquidity is more advanced and better suited for decentralized governance.

Starting in 2024, the HTX exchange will allocate a certain percentage of its revenue (currently 50%) each quarter to add liquidity to the $HTX liquidity pool on decentralized exchanges (DEXs) and then permanently burn the LP tokens received.

This mechanism isn't complex, but to fully understand it, it's essential to learn about some basic concepts related to DEXs.

What Are DEXs?

The key feature of decentralized exchanges (DEXs) is that all transactions are publicly recorded on the blockchain, making every transaction traceable. Assets are held in individual users' wallets rather than by a central entity. Prominent examples of DEXs include Uniswap, Pancakeswap, and SUN.io. Each liquidity pledge and LP token burn can be verified via blockchain explorers.

What Are Liquidity Pools?

Liquidity pools are a fundamental concept in the DeFi space, facilitating trading on DEXs.

A liquidity pool enables decentralized trading between two tokens via a smart contract, instead of through a centralized market maker.

Anyone can add liquidity to a pool. For instance, you could create a BTC/USDT liquidity pool on a DEX by depositing both BTC and USDT tokens. This same process applies when adding liquidity.

To trade within the pool, users can deposit BTC to receive USDT, or vice versa. This mechanism, which allows for the exchange of one token for another, is the principle behind a liquidity pool. When multiple such pools are created, they form a decentralized exchange.

Liquidity is added based on a certain ratio, which reflects the token prices in the pool. For example, if the current price of BTC is $70,000, adding liquidity requires a proportional deposit of 1 BTC and 70,000 USDT.

In liquidity pledges, HTX DAO adds liquidity to the TRX/HTX liquidity pool, meaning HTX DAO contributes both TRX and HTX tokens.

What Are LP Tokens?

LP stands for Liquidity Providers, and LP tokens are proof of providing liquidity as a market maker. After adding liquidity to a pool, providers receive LP tokens as a certificate. To withdraw liquidity, the provider must return these LP tokens to the DEX, redeeming the original tokens added to the pool. LP tokens are the proof required for redeeming liquidity.

What Does Burning LP Tokens Mean?

Adding liquidity is common—anyone can do it. However, burning LP tokens is a rarer practice.

The unique feature of liquidity pledges is that HTX DAO will burn the LP tokens obtained from each pledge. This means the liquidity provided to the TRX/HTX pair cannot be withdrawn and is permanently locked in the liquidity pool.

How Does Liquidity Pledge Work?

1. Each quarter, the amount for liquidity pledge is decided based on HTX's revenue.

2. The specific amounts of $HTX and $TRX are determined according to the price ratio in the liquidity pool.

3. Liquidity is added to the TRX/HTX liquidity pool.

4. The LP tokens received from adding liquidity are burned.

5. The hash of the operations is made public, completing the liquidity pledge process.

How Does Liquidity Pledge Impact HTX DAO?

By burning LP tokens, liquidity pledges make $HTX increasingly decentralized and enhance the security of the liquidity pool. As liquidity grows, the trading depth and experience for $HTX tokens improve.

Liquidity pledges effectively relinquish ownership of $HTX, as the two tokens in the TRX/HTX trading pool can never be redeemed, ensuring permanent liquidity. With each quarterly liquidity pledge, the pool's liquidity increases, significantly aiding in the price stability of $HTX.

For a more detailed discussion on how this affects $HTX's price, please see the next tutorial.

HTX DAO's Past Liquidity Pledges

HTX DAO conducted its first liquidity pledge on March 16, 2024, with future pledges scheduled for the end of each quarter.

In the first pledge, $21 million was added to the TRX/HTX liquidity pool across three DEXs: $16.8 million (80%) on Sun.io (TRON), $2.1 million (10%) on Uniswap (ETH), and $2.1 million (10%) on Pancakeswap (BSC).

The second pledge took place on July 16, 2024, with $21.5 million contributed.

For more details, visit the Liquidity Pledge page on the HTX DAO official website. You can also verify the LP burn records on the TRON blockchain using the transaction hashes provided in the announcements.

Summary

HTX DAO's liquidity pledges go beyond burning LP tokens; they also add liquidity to $HTX. This approach is more innovative and forward-thinking than the traditional method of simply burning tokens. It also aligns with HTX DAO's governance philosophy of creating a decentralized community.