Initialization of liquidity token supply

3.4 Initialization of liquidity token supply

DEX Raiden v1 sets the initial share supply to be equal to the amount of ETH / BNB deposited.

This was a somewhat reasonable value, because if the initial liquidity was deposited at the correct price, then 1 liquidity pool share (which, like ETH / BNB, is an 18-decimal token) would be worth approximately 2 ETH. However, this meant that the value of a liquidity pool share was dependent on the ratio at which liquidity was initially deposited, which was fairly arbitrary, especially since there was no guarantee that that ratio reflected the true price.

DEX Raiden v1.1 supports arbitrary pairs, so many pairs will not include ETH or BNB at all.

Formula ensures that a liquidity pool share will never be worth less than the geometric mean of the reserves in that pool. However, it is possible for the value of a liquidity pool share to grow over time, either by accumulating trading fees or through “donations” to the liquidity pool. In theory, this could result in a situation where the value of the minimum quantity of liquidity pool shares (1e-18 pool shares) is worth so much that it becomes infeasible for small liquidity providers to provide any liquidity. To mitigate this, DEX Raiden v1.1 burns the first 1e-15 (0.000000000000001) pool shares that are minted (1000 times the minimum quantity of pool shares), sending them to the zero address instead of to the minter. This should be a negligible cost for almost any token pair. But it dramatically increases the cost of the above attack. In order to raise the value of a liquidity pool share to $100, the attacker would need to donate $100,000 to the pool, which would be permanently locked up as liquidity.