Adding new tokens to the DEX

The DEX has to offer a price for every currency, otherwise it cannot be traded. When adding a new currency for the DEX, an initial price must be set. The process of adding a new currency shall be explained by the imaginary token NEW which is traded on other exchanges with a price of $1 per unit.

Adding new tokens to the DEX is done via governance. In that proposal, apart from some other settings, an initial price has to be set. The price that will be set initially will be way below the external market price, for example at $0.01. The reason to set a low price is to account for potential price changes during the proposal's voting period. When the proposal has finished and the token is tradable, there is little incentive to sell the token or add liquidity since its priced lower compared to other exchanges. Consequently, as long as the liquidity pool is empty (or below the threshold set in the proposal), the protocol will gradually increase the token's price. At some point, the price offered by the DEX will be on the same level as on other exchanges, which makes selling it profitable and marking the start of a new currency offered on the Kopi DEX.

To accelerate price adjustments of new tokens, users can add small amounts of liquidity to the exchange: Tokens with little or no liquidity have high price fluctuation. By adding liquidity and have it bought by others, the price can quickly adjust to prices on external exchanges. Once the price is the same (or at least close), users can add bigger amounts of liquidity which then decreases the price fluctuation when trading, i.e. making the price more stable.