Liquididty

Overview

Adding liquidity allows the contributor to earn 0.05% swapping fees from the pairs they've provided. You can supply liquidity and start earning fees via adding liquidity here. Your liquidity can earn even more rewards (Natives) if they're staked at farms! When you've provided liquidity, you will receive XXX-LP tokens (Rabbit swap Liquidity Provider tokens) as proof of contribution. For example, if a user deposited $XXX and $PULSE into a pool they would receive XXX-PULSE LP tokens as a part of fee distribution. These tokens represent a proportional share of the pooled assets. These LP tokens can be staked at farms to earn XXX. We have Few pairs for you to stake to begin, and plan to expand the list over time as more assets are made available on Pulse Chain.

How a pool accrues value from fees

If at the time of a trade, there are 100 XXX-LP tokens representing 100 PULSE and 100 XXX, each LP token would be worth 1 PULSE and 1 XXX. If one user trades 10 Pulse for 10 XXX, and another traded 10 XXX for 10 PULSE, then there would now be 100.005 XXX and 100.005 PULSE in the pool. This means each LP token would be worth 1.00005 XXX and 1.00005 PULSE when it is withdrawn.

Adding liquidity to an existing pool

You need to provide tokens in a 1:1 value ratio to the liquidity pool. This means that if you are adding to, say, a XXX-PULSE pool, and wish to provide 1000 PULSE worth of liquidity, you would need to convert approx 500 PULSE to an equal value of XXX tokens first using the swap tool.

Adding liquidity to a new pool

If the pool you wish to provide liquidity to does not exist, you can create it yourself. Just provide the tokens and off you go. As the first liquidity provider, you set the initial exchange ratio (price) if one of the tokens in the pair does not exist yet on Rabbit Swap. This often quickly corrects itself through arbitrage and by more liquidity providers adding to the pool.

Impermanent Loss

Impermanent Loss (known as IL) is one of the risks you take on for being a liquidity provider and is a result of how AMMs function. Here are two articles to better explain it: Understanding Uniswap Returns Beginners Guide to Getting Rekt by Impermanent Loss

They will give you an idea of what IL is and how you are affected by it.

TL;DR: Large swings in the relative price difference of the two tokens in the pool could result in a loss compared to holding the tokens themselves if you withdraw at that precise moment (hence the term impermanent). The loss is only "permanent" if you withdraw your liquidity completely, however, that does not mean the IL will necessarily go away over time. Generally speaking, the trading fees received for being a liquidity provider and the yield from the farm can offset IL risk, but nothing is guaranteed.