Learn how to become a liquidity provider on DEXs and earn trading fees. Understand impermanent loss.
LiquidityIntermediate20-30 minutes6 stepsPrerequisites: Two tokens in equal value, ETH for gas
On this page
Quick Overview
1Choose a Pool
2Calculate Your Deposit
3Approve Tokens
4Add Liquidity
5Receive LP Tokens
6Stake for Extra Rewards (Optional)
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
Key Risks:
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%
. -
Track your LP positions with Fensory. Monitor fees, IL, and total returns.
Start Tracking →
Step-by-Step Instructions
1
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
2
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
3
Approve Tokens
Approve both tokens if this is your first time using them on this DEX.
Tips
✓Consider limited approvals for security
4
Add Liquidity
Enter amounts and confirm. For concentrated liquidity, set your price range.
Warnings
⚠Narrow ranges earn more but have higher IL risk
5
Receive LP Tokens
You will receive LP tokens or an NFT representing your position.
Tips
✓These are needed to withdraw your liquidity
6
Stake for Extra Rewards (Optional)
Many pools offer extra rewards if you stake your LP tokens.