How can one earn rewards by providing liquidity?

DeFi Wizard May 31, 2022

Since the beginning, the DeFi space has been quite fascinating. Over the years, a wide array of protocols have only strengthened the ecosystem to make it a stellar experience for the investors and companies in the space. This explosion of popularity and a massive part of the sector’s growth is attributed to the global liquidity pools that enable the decentralization of liquidity to the users.

As of October 2021, the total value locked in liquidity pools in USD is $104.15B. These pools are popularly employed by decentralized exchanges (DEXs), borrow-lend protocols, synthetic assets, on-chain insurance, and yield farming. In addition, financial services are facilitated by using liquidity pools in conjunction with smart contracts.

Liquidity in the CeFi modules is provided by a centralized organization, such as a bank. In contrast, it is typically offered by a market maker who connects buyers and sellers on a cryptocurrency exchange. However, in DeFi, liquidity is provided by individual users who are rewarded for depositing cryptocurrency. The rewards can take the form of a percentage of transaction fees or additional cryptocurrency tokens.

Key definitions that you need to know before moving forward:

  • Liquidity Pool- Consider a liquidity pool as a collection of cryptocurrency assets secured by a smart contract. The funds can then be used for trades, loans, and various other purposes.
  • Liquidity Provider- A liquidity provider (LP) is a user who supplies cryptocurrency assets to a liquidity pool for the funds to be used for the associated DeFi protocol.

Liquidity providers must deposit a pair of tokens into liquidity pools available on Uniswap or Pancakeswap for whatever cryptocurrency they choose to add liquidity for. They are incentivized for such activities, and the rewards are distributed in LP tokens.

Liquidity providers receive liquidity provider tokens (LPTs) in exchange for depositing tangible cryptocurrency assets. These LPTs represent the users’ share of the selected liquidity pool.

LPTs are similar to receipts in that they are used to establish ownership. At any time, the user may cash out their staked deposit using the LPTs.

Let’s look at an example to make it easier for the users to understand the process.

  1. If you want to add liquidity for the $CAKE / $BNB pair, you need to deposit $CAKE and $BNB tokens into the liquidity pool available on Pancakeswap.

2. The tokens are always deposited in pairs; in this case, it is $CAKE & $BNB. After adding these tokens to the liquidity pool, the liquidity providers will get LP tokens in return. In this case, they will receive “CAKE-BNB LP tokens.

3. The main part comes into play when users want to earn rewards from these LP tokens. This wish is fulfilled with the help of “Staking” these LP tokens on various platforms. Users can stake these LP tokens at LP staking dashboards of the respective projects and earn more rewards as per the staking rules.

DeFi Wizard has been delivering its services to various blockchain projects; Among the products that we offer to various blockchain projects, the LP staking dashboard has high demand— Here is the list.

We create custom LP staking dashboards compatible with multiple chains such as Ethereum, BSC, Polygon etc., for our clients as per their needs.

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