💧 Liquidity Pools: Your Farm Foundation
Understand how liquidity provision generates yields
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0 / 5 completed💧 Liquidity Pools: The Foundation
Liquidity pools are smart contracts that hold pairs of tokens, enabling decentralized trading. When you add liquidity, you become a Liquidity Provider (LP) and earn rewards from trading fees.
How Pools Work
🔄
Automated Market Maker (AMM)
Pools use the formula x × y = k to automatically price trades. No order book needed!
🎫
LP Tokens
Receive tokens representing your share of the pool. Burn them to withdraw your liquidity + fees.
Example: ETH/USDT Pool
• Pool contains: 100 ETH + 200,000 USDT
• Constant product: 100 × 200,000 = 20,000,000
• Someone buys 10 ETH → pool now has 90 ETH + 222,222 USDT
• New ETH price: 222,222 ÷ 90 = $2,469 (price increased!)
🎮 Interactive: Add Liquidity to Pool
Adjust amounts to see pool composition. Pools require balanced value (50/50):
$20,000
1 ETH50 ETH
$1,000$100,000
Pool Composition
ETH50.0%
USDT50.0%
Total Value
$40,000
Balance Status
✓ Balanced
🎮 Interactive: Impermanent Loss Calculator
See how price changes affect your returns compared to just holding:
$1,000$5,000
$1,000$5,000
Impermanent Loss Analysis
Price Change:+25.0%
Impermanent Loss:-0.62%
What this means:
You'd have 0.62% more value if you just held the tokens instead of providing liquidity
💡 Key Insight
Impermanent loss occurs when token prices diverge from initial ratio. It's "impermanent" because it disappears if prices return to original levels. Trading fees and farming rewards often offset IL.
Becoming a Liquidity Provider
✅
Benefits
- •Earn 0.25-0.3% of all trades as fees
- •Additional token rewards (often 20-100%+ APY)
- •Passive income on idle assets
- •Withdraw anytime (most pools)
⚠️
Risks
- •Impermanent loss from price divergence
- •Smart contract vulnerabilities
- •Token price volatility
- •Gas fees for deposits/withdrawals