📚 How to crypto Investor | Liquidity providing practice
Last week we analyzed how the liquidity pools work and how to earn with them. It needs reminding that liquidity providers can receive a part of the transaction fees from a pool. Specially for those interested in this kind of earnings, we prepared a step-by-step guide on using the LP. We used 1inch as an example. Let's go:
How to find a liquidity pool
Let's start with a simple - choose a suitable pool.
You need to go to the 1Inch app and find the tab "Earn" on the top panel and then click on "Pools":
We'll see a whole list of pools:
Let's go through the list by columns:
- A circle diagram - indicates how many parts you need to split your capital to provide liquidity.
- The pool's smart contract address, allows you to check the authenticity of the pool.
- Coins of liquid pair and its share in a pool.
- The total $ amount of provided liquidity. The more liquidity, the less the price fluctuation (and therefore impermanent losses).
- The amount of liquidity provided by you.
- The pool's APY - is the rate that determines your income as a percentage of the amount provided.
When you click on a certain pool, you will see more information, including the amount of exchange and yield over the last 24 hours.
Liquidity providing
Before choosing a pool, note that you should already have on your wallet the coins of a liquid pair (we have BNB and BUSD). So there is two option:
If you do not want to swap - use a filter to find a pool with coins that you already have in your wallet:
If the priority is profit/security - look for the safest/profitable pool, and then swap to get the needed tokens.
When we found a suitable pool:
1. Click on the pool in the list and study additional information if necessary. Then click on the "provide liquidity":
2. The site will use your wallet balance to automatically calculate how maximum tokens you can send and how many LP tokens get. Or select the amount you want to provide in dollars, and the calculations will change with your limit:
3. When you set the amount, click on "Give permission". Next, you need to confirm the transaction via MetaMask (or any other of your wallet).
You are now a liquidity provider and holder of LP token, which confirms your participation in the pool. You can check your balance and LP tokens on 1Inch. To do this, just click on the wallet address in the upper right corner:
You should see a transaction that issued you LP tokens:
Liquidity removing
If you are not satisfied with the yield or need your coins - you can remove liquidity from the pool. To do this:
1. Click on the pool where you provided liquidity and find the "remove liquidity" button:
2. Press it to see the following window:
You can exit the pool completely or only with a part of the tokens - it all depends on how many LP tokens you are ready to burn.
Important: 1Inch pays liquidity rewards only when you leave the pool - the displayed withdrawal amount already includes your income.
And few warns
Do not forget about the liquidity pool's impermanent losses. These include:
Lost profit - when the prices in the LP are lower, the average market value. In such cases, the liquidity provider earns less on its coins than if it just kept them in the wallet.
Volatility - you provided 1ETH with a price of $2,000 in a pair with USDT, and then it dropped to $1,000. As a result, you have provided $4K of liquidity (1 ETH+2k USDT) but will only withdraw $3K. It's mean that if you provided liquidity after the price fell, you would need less capital for the same results.