 | Because parts of crypto is underused. And to be honest, it is hard to figure this stuff out on your own. I figure I should make a guide on Liquidity pools and how to yield farm. Also what is the risk that come with this. ____________________ What is liquidity?Liquidity is basically the supply of something. So for example, if you take out a loan from a bank, the money doesn't come from the sky. It comes from the supply of money the bank has access to. Many times, this supply comes in from savings accounts, which is why you get interest. Note: Back in the day savings accounts use to pay out 5% interest. Where as now it's something like 0.01%. This is directly due to too much supply and something you need to note in crypto. So a Liquidity Pool or LP is just basically a pool of liquidity. So when Decentralized exchanges (DEX) or decentralized finance (DEFI) sells crypto or gives out a loan. It needs liquidity to pull from. _______________ What is a LP Token?An LP token or Liquidity Pool token is just basically a coin representing how much you put into the pool. ____________ Note, for the rest of this I will be using Pancake Swap as an example. But much of this applies throughout.________ How to make passive income with LP/Liquidity mining?So to get an LP token you need to provide a pair. For example The pair is linked to the dollar amount. So for example:
You can only use one coin 2 because the $ amount has to be equal between them. Anyways, by simply providing liquidity you get some of the trading fees or loan payback as people use the liquidity. The amount you get can massively change depending on demand and supply of liquidity. For example BNB-Cake is popular so the rewards are estimated 0.81%. Where as BUSD-Cake at this time estimate is 5.78%, or this will give you about 30.39%, or what about an estimated 44.74%. I'm sure you get my point. But note these numbers can change as liquidity supply does change. _____________________________ RiskImpermanent loss is the ultimate risk when dealing with LP. Remember, your pair has to equal $ value. Which means it will always be paired with the lowest cost of the pair. For example, if your pair is BNB-Cake, and lets say Cake triple in price but BNB stayed the same. Your Cake coins will reduce until it matches the $ value of BNB. So for those visual.
This is a pretty good calculator that can help you if you are still having a hard time understanding this. https://dailydefi.org/tools/impermanent-loss-calculator/ NOTE: This is honestly something you only need to worry about when you pull out. If both coins move the same direction then this lowers the impermanent loss. Like if both coins did a 3x then you would have a 0% impermanent loss, and your value will increase by 3x. But any change at all from 1 that isn't meet with the other. This causes impermanent loss. The bigger the gap, the more the impermanent loss. So like if you used one of the odd coins I showed and they were a rug pull. Then this can massively lower your value and lower the overall what you get back. There is a reason why supply for those are low. And it is your job to figure out if that is justify or not. ___________ InsuranceSome DEX and DEFI has "insurance" on impermanent loss. More than less, they don't protect against value loss but do protect against impermanent loss. Note the policies and if they can change. Like they might only cover part of it or do it only for given coins. As far as I can tell, at the time of writing this Pancake Swap doesn't have this. There might be some 3rd party stuff, but note scams. _________ How to make passive income with Yield Farming?So this can get super complicated and takes a lot of hands on, or super easy and super passive. I'm going to cover the passive bit because the complicated hands on will make this post 5 times longer and hopefully most aren't already overloaded. So yield farming is Types of yield farming:
https://blockworks.co/what-is-yield-farming-what-you-need-to-know/ (they summed it up extremely well) Anyways, the point is to maximize how much yield you will get with your money. So lets take a look at the OLE-BUSD pair where you get 44.74% just for having the LP token. Now if you stake that LP token You get 162.33% APR and with Pancake you get a 0.5x multiplier. If you compound every day you get 233.89% If you do that for 5 years you could turn $100 to $41,395.46 estimated. This is assuming Cake keeps it's current value.Which means if Cake does a 24x in price. Then you could be looking at $1million in rewards by yield farming and starting with $100. Now to be blunt, this isn't realistic. Like it isn't realistic for Cake to 24x. And the numbers will change over time based on supply and demand. Note: If you don't want to deal with impermanent loss but still want to play. Pancake does allow you to stake Cake and get rewarded in Cake or other coins.So in this, you will be able to protect yourself to a degree, and you might find the payout to be better anyways depending on your funds. Basically, you stake cake and get whatever. One thing it does have is auto compounding if you allow it. Note the current calculators it has doesn't show you the compounding. ____________________ Some care more about the rewards and couldn't care less if their LP is a rug pull?We mostly covered this, but basically you are after the reward vs what you have. So say for example you honestly don't care about a given pair, you might believe it will be a rug pull, or whatever. But the reward payout is high. The reward payout could be so high and so worth it that what you use to get there doesn't matter. What you get out of it is the only thing that matters. So for example, if you don't care about the following pair BUT you really want Cake. My point is, this happens all the time. ______________ Important: None of the coins/tokens I mention about I'm giving advice on. I'm just using them as an example for this post. [link] [comments] |
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