Hello everyone!
Today, I am going to talk a bit about liquidity pools (LP's) and more in particular, the Holozing Liquidity pool which is offering an astonishing apr of 227,45% at the moment of writing. Ofcourse this apr could move up- or downwards as more people are contributing. First I'll talk a bit more about liquidity pools as there are certain risks associated with them and afterwards, I'll show you how you can add liquidity to the Holozing LP.
A liquidity pool is a smart contract that contains a reserve of two (or more) cryptocurrency tokens in a decentralized exchange (DEX). Liquidity pools encourage investors to earn passive income on cryptocurrencies that would otherwise be idle.
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They are used for swapping a token to another token. In the case of Holozing, there is a liquidity pool with swap.hive-zing. When you add liquidity, which means as much adding an equal value of both tokens to the pool, you can receive rewards, which are paid out in the form of zing tokens.
You are probably wondering, why would someone hand out rewards for just having people add liquidity? Well, as a project, having a token is one thing, but when people can't trade that token, than it's kind of use- and worthless. So the creators of Holozing want to have enough liquidity for the case when people want to get in or out, it's possible without the price of zing plummeting or skyrocketing. That's why they foresee the rewards.
There are risks associated with adding liquidity to a LP though. I'll try to explain the most important one, Impermanent Loss.
Impermanent loss happens when you provide liquidity to a liquidity pool, and the price of your deposited assets changes compared to when you deposited them. The bigger this change is, the more you are exposed to impermanent loss. In this case, the loss means less dollar value at the time of withdrawal than at the time of deposit.
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I'll give an example to explain it more clear as definitions are often not that easy to understand. Let's say, I'll add 100 swap.hive to the LP of Holozing, than I have to add about 6300 zing as well. You always have to add equal value of the two tokens. At the moment of writing 100 swap.hive = 6300 zing = $34. The total liquidity in the pool is 1000 swap.hive and 63000 zing.
Let's say the price of swap.hive goes x4 but the price of zing stays the same. This means that more zing will be added to the pool and lesser swap.hive will be in the pool. In total there will now be 500 swap.hive and 126.000 zing in the pool. As we had a 10% share, that equals to 50 swap.hive and 12.600 zing for us. As the price of swap.hive went x4, our 50 swap.hive is now worth $68 and our zing stayed the same in value, so it is now worth $68 as well, giving us a total value of $136. These are some nice profits as we managed to x2 our value in the liquidity pool. But when we look at the result if we didn't add liquidity pool, we would still have 100 swap.hive which equals $136 and 6300 zing which equals $34, granting us a total of $170.
As you can see in above example, just holding would have been better if no rewards would be given. That's why projects add rewards, as otherwise people wouldn't want to add the liquidity. Ofcourse the question now arises, what's best? Are the rewards the LP gives 'outperforming' the impermanent loss? There is no 100% exact and correct answer to that question in my opinion. As it all depends on what the prices of the tokens involved in the LP will do, which nobody knows. Ofcourse, you can simulate some outcomes for yourself and decide based on them what your most optimal strategy is. I just wanted to point out that there are risks and you have to be aware! ;)
There are multiple ways of adding liquidity to a LP, I'll just choose one DAPP named tribaldex, for the convenience of being more clear. But you could use beeswap and probably a dozen others as well. Feel free to add in the comments your preferred option, so everyone can learn from eachother!
First, you'll have to go the https://tribaldex.com/ which gives you the following screen:
The next step is to login, sounds obvious but as it's a step-by-step guide, I wanted to point it out. They accept Keychain and smartlock. You have to type your name, click on the method you would like to use, login and eventually confirm in your keychain add-on if you didn't do that yet.
The next step is to click on pools at the topside of your screen:
Afterwards, you have to click on adding liquidity as you can see on the picture below:
On the following screen, you'll be able to add the liquidity you want:
Step 1: Choose the pool, in this example, it's the zing:swap.hive pool.
Step 2: Choose the amount of tokens of Zing (and its equal value of swap.hive) you want to add to the pool.
Step 3: Press 'Add liquidity'
Step 4: Enjoy your liquidity rewards, which should be available 24 hours after you added liquidity.
I hope you enjoyed reading this article about providing liquity and its risks. I am not going to tell you what the best strategy in terms of the LP is, as I can't. It all depends on the future prices of the tokens but I wanted to give you some knowledge so you're able to make your own informed decisions! :)
