How to Provide Liquidity
Liquidity providers (LPs) deposit tokens into DEX pools and earn trading fees. It is one of the most popular DeFi strategies but requires understanding impermanent loss.
Why Provide Liquidity?
Potential Returns:- Trading fees: 5-50% APY
- Token incentives: 10-100%+ APY
- Points programs
- Impermanent loss
- Smart contract risk
- Token price volatility
Understanding Impermanent Loss
IL occurs when token prices change after you deposit. The more prices diverge, the greater the loss compared to holding.
| Price Change | IL |
|---|---|
| . . . . . . . | . . - |
| 1.25x / 0.8x | 0.6% |
| 1.5x / 0.67x | 2.0% |
| 2x / 0.5x | 5.7% |
| 3x / 0.33x | 13.4% |
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Step-by-Step Instructions
Choose a Pool
Select a pool based on token pair, fees, and TVL. Stablecoin pools have less IL.
Tips
- ✓Higher TVL = more liquidity = less slippage for you
Calculate Your Deposit
You need equal value of both tokens. Use the DEX interface to calculate.
Tips
- ✓You can often deposit single-sided with a swap
Approve Tokens
Approve both tokens if this is your first time using them on this DEX.
Tips
- ✓Consider limited approvals for security
Add Liquidity
Enter amounts and confirm. For concentrated liquidity, set your price range.
Warnings
- ⚠Narrow ranges earn more but have higher IL risk
Receive LP Tokens
You will receive LP tokens or an NFT representing your position.
Tips
- ✓These are needed to withdraw your liquidity
Stake for Extra Rewards (Optional)
Many pools offer extra rewards if you stake your LP tokens.
Tips
- ✓Check for gauge/farm incentives