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 POSI and BUSD into a Liquidity Pool, you'd receive POSI-BUSD LP tokens.
The number of LP tokens you receive represents your portion of the POSI-BUSD 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 Position Exchange, 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 POSI and 10 BUSD tokens.
- 1 LP token = 1 POSI + 1 BUSD.
- Someone trades 10 POSI for 10 BUSD.
- Someone else trades 10 BUSD for 10 POSI.
- The POSI/BUSD liquidity pool now has 10.017 POSI and 10.017 BUSD.
- Each LP token is now worth 1.00017 POSI + 1.00017 BUSD.
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 Position Exchange 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