Wondering about the upcoming launch of the IX Swap Liquidity Mining Program? Are you unsure of the risks and benefits involved with providing liquidity? This article has you covered.
What Is Liquidity Mining?
In simplest terms, it means providing liquidity in return for “mining” rewards.
Using IX Swap as an example, liquidity providers will provide liquidity on the IX Swap protocol by providing their assets (such as ETH). When another protocol user wants to exchange their IXS tokens for ETH, there will be enough liquidity/tokens available for trade.
The user making the trade will pay a fee to the protocol, of which a part of the fees will go to the liquidity provider for providing their assets.
LP (Liquidity Provider) Tokens
If you deposited ETH and IXS into the IX Swap liquidity pool, you would receive ETH-IXS LP tokens.
The number of LP tokens you receive represents your portion of the ETH-IXS Liquidity Pool, thus representing your share of the LP rewards of up to 2,500% APY!
You can also redeem your funds at any time by removing your liquidity. Lastly, you may choose to stake your LP tokens on the IX Swap platform for additional rewards!
Impermanent loss (which should be called permanent loss) is the money that you lose when you provide liquidity (to a protocol). To be clear, it is not the money you lose for using IX Swap to trade tokens (that’s a service fee), but the money you lose if you provide liquidity on the back end (i.e., if you make the trades possible).
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.
Pools that contain assets that remain in a relatively small price range will be less exposed to impermanent loss. Stablecoins or different wrapped versions of a coin, for example, will stay in a relatively contained price range. In this case, there’s a smaller risk of impermanent loss for liquidity providers (LPs).
So why do liquidity providers still provide liquidity if they’re exposed to potential losses? Well, the impermanent loss can still be counteracted by trading fees. In fact, even pools on Uniswap that are quite exposed to impermanent loss can be profitable thanks to the trading fees.
IX Swap charges a fee on every trade that directly goes to liquidity providers. If there’s a lot of trading volume happening in a given pool, it can be profitable to provide liquidity even if the pool is heavily exposed to impermanent loss. This, however, depends on the protocol, the specific pool, the deposited assets, and even wider market conditions.
About IX Swap
IX Swap is a next-generation platform that leverages DeFi services backed by CeFi regulatory compliance to facilitate safe and convenient issuance, listing, and trading of security tokens and fractionalized NFTs.
By bridging the gap between traditional finance and innovative blockchain-based solutions, IX Swap is paving the way in democratizing access to traditional financial markets that have never been done before.