When you add your token to a Liquidity Pool, you will receive Liquidity Provider (LP) tokens and share in the fees.
As an example, if you deposited CANARY and SGB into a Liquidity Pool, you'd receive CANARY-SGB LP tokens.
The number of LP tokens you receive represents your portion of the CANARY-SGB Liquidity Pool.
You can also redeem your funds at any time by removing your liquidity.
Providing liquidity gives you a reward in the form of trading fees when people use your liquidity pool.
Whenever someone trades on CanaryXSwap, the trader pays a 0.25% fee, of which 0.17% is added to the Liquidity Pool of the swap pair they traded on.
- There are 10 LP tokens representing 10 CANARY and 10 SGB tokens.
- 1 LP token = 1 CANARY + 1 SGB
- Someone trades 10 CANARY for 10 SGB.
- Someone else trades 10 SGB for 10 CANARY.
- The CANARY/SGB liquidity pool now has 10.017 CANARY and 10.017 SGB.
- Each LP token is now worth 1.00017 CANARY + 1.00017 SGB.
To make being a liquidity provider even more worth your while, you can also put your LP tokens to work whipping up some fresh yield on the CANARY Farms, while still earning your 0.17% trading fee reward.
Providing liquidity is not without risk, as you may be exposed to impermanent loss. “Simply put, impermanent loss is the difference between holding tokens in an AMM and holding them in your wallet.” - Nate Hindman