When you add your token to a Liquidity Pool, you become a Liquidity Provider (LP) and share the trading fees from the pool.
If a token pair does not have sufficient liquidity, it will be costly, or even fail to be traded. Hence liquidity providers are extremely important for the exchange. Providing liquidity will get you LP Tokens, which will earn you rewards in the form of trading fees for making sure there's always liquidity for the exchange to use.
To stake in a ECO-USDT liquidity pool, you will need the Wrapped ECO (WECO), which is 1:1 in value to ECO.
As an example, if you deposit WECO and USDT into a liquidity pool, you will receive ECO-USDT LP tokens.
The number of LP tokens you receive represents your portion of the ECO-USDT Liquidity Pool.
You can also remove your funds at any time for redemption.
Providing liquidity gives you a reward in the form of trading fees when people use your liquidity pool.
When a user make a trade on Exabc, he pays a 0.25% fee, of which 0.17% is added to the Liquidity Pool of the swap pair they traded on. The earning breakdown is as below:
- There are 10 LP tokens representing 10 WECO and 10 USDT tokens.
- 1 LP token = 1 WECO + 1 USDT Someone trades 10 WECO for 10 USDT.
- The user make a trade of 10 USDT for 10 ECO.
- The ECO/USDT liquidity pool now has 10.017 ECO and 10.017 USDT.
- Each LP token is now worth 1.00017 ECO + 1.00017 USDT.
To encourage liquidity providers, LP tokens can be staked on WECO Farms to earn yield, on top of earning 0.17% trading fees.
Providing liquidity is not without risk, as you may be exposed to impermanent loss.