As the website states, centralized and decentralized exchanges have existed since the birth of cryptocurrencies, and Uniswap has recently taken advantage of the economics of a constant product automatic market-making (AMM) mechanism. AMM has attracted a large amount of liquidity on Uniswap. AMM is a tool utilized to supply liquidity in decentralized finance (DeFi) without the intervention of a third party to set the price of an asset.
While Uniswap fees incentivize liquidity, and the constant AMM algorithm balances liquidity providers, Magic Liquidity Rainbow believes the incentives are insufficient. Hence, this platform was created with the token RAINBOW to seek to provide long-term incentives for liquidity providers on Uniswap.
Besides this, in YFI (yearn finance), token farming has sparked a boom. Farming is simply the practice of staking or lending tokens in exchange for transaction fees or interest, and Magic Liquidity Rainbow predicts the same to happen with liquidity tokens on Uniswap (and other AMMs.) Regarding technicality, liquidity pool (pool of tokens) tokens are identical to the tokens users might farm on YFI. Still, they often have a high intrinsic worth, especially when paired with WETH (Wrapped Ethereum).
Uniswap liquidity providers or LPs often only receive trading fees if they provide liquidity and there is trading volume to match, resulting in fees for the specific markets they engage with. This volume focuses on the LPs that are dissolved when volumes are high. Therefore, the percentage yield on their tokens in the liquidity pool and their significance in the liquidity to volume ratio is constantly shifting. Contrary to popular belief, a liquidity pool's yield can be inversely related to yield. The Rainbow system rewards staking these LP tokens in WETH paired pools by returning a yield of RAINBOW tokens and distributing them proportionally.
Furthermore, the platform includes a 10% RAINBOW distribution delivered to the developer wallet upon the retrieval of staked coins to fund the project's development. The platform seeks to ensure security audits, future innovations, and improvements by allocating a small fraction of newly generated coins to the development team.
