You can provide liquidity to Bitcoin.com’s Verse DEX decentralized exchange by depositing assets into liquidity pools. You receive a return in the form of the fees paid by people trading the pair.
A liquidity pool is a collection of cryptocurrencies, or digital assets, that help facilitate more efficient financial transactions such as exchange, lending, and yield generation. Individuals who invest their wealth in liquidity pools receive rewards for their deposits.
Decentralized exchanges (DEXs) enable the permission-free exchange of any cryptoasset. Trading on DEXs is made possible by humans adding liquidity to trading pairs. Unlike centralized exchanges, anyone can add a cryptoasset trading pair to a DEX or bolster an existing trading pair by providing liquidity. A smoothly functioning stock exchange is not possible without sufficient liquidity. Therefore, DEXs incentivize people to add liquidity by passing on a portion of DEX fees to liquidity providers.
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By providing liquidity on Verse DEX, you receive a proportional share of the fees generated on the trading pair you fund. Specifically, 0.25% of trading volume is paid out to Liquidity Providers (LPs). That means if the trading volume is high in your chosen pool, the rewards you earn will be high as well. On the Verse DEX Pools tab, you can see the current APY for each Verse DEX pool, as well as your pool position and the amount you’ve earned:
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Liquidity providers on Verse DEX are also eligible for Verse Farms rewards.
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For a step-by-step guide to using Verse Farms, check out this guide.
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On the Pools tab, select the pool you want to add liquidity to and click Add.
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Enter the amount you wish to deposit. Note that you must deposit equal amounts of both assets into the liquidity pool.
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Select “Unlock and transfer money”.
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Confirm the transaction in your wallet.
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You’re done! You will now receive a share of all fees generated in your pool.
You can track your rewards in the “Pools” tab and withdraw your liquidity + rewards at any time.
Here is a video showing how to deposit into liquidity pools to earn returns:
Liquidity Pool (LP) tokens are a type of digital asset that represent an individual’s share of a decentralized exchange’s liquidity pool. When you deposit assets into a liquidity pool on Verse DEX, you receive LP tokens. Read more about LP tokens here.
Impermanent Loss (IL) refers to the unrealized opportunity cost of the price of a token in the pool moving relative to between the time you deposit tokens into a liquidity pool and the time you withdraw them his couple changes. It is an unrealized opportunity cost – ie not a real loss – for two reasons. First, because it is measured by what the value of your deposited assets would have been if you had simply held them (ie not put them in the pool). This means that while you are still in an IL position, it is entirely possible for the dollar value of your liquidity pool tokens to increase. Secondly, it is not realized or ephemeral as the relative value of the tokens in the pool can revert back to the same ratio in which you deposited them. In other words, as long as you don’t withdraw your liquidity from the pool when the ratio goes out of whack, your loss will not be realized.
Why do people still provide liquidity to DEXs when they face potential losses? This is because the return paid to liquidity providers has the potential to more than offset the risks associated with IL. In the case of the Verse DEX, as described above, the return for liquidity providers is a proportionate 0.25% of the trading volume for the pair. In many cases, there is also an opportunity to trade liquidity pool tokens for additional rewards, known as yield farming. Liquidity providers on Verse DEX are currently eligible for Verse Farms awards.
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For a step-by-step guide to using Verse Farms, check out this guide.
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