You can provide liquidity to Bitcoin.com's decentralized exchange Verse DEX by depositing assets into liquidity pools. You’ll earn yield in the form of the fees paid by people who trade the pair. This feature is available in both the Bitcoin.com Wallet app and via the web at Verse DEX.
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What is a liquidity pool?
A liquidity pool is a collection of cryptocurrencies or digital assets that help facilitate more efficient financial transactions such as swapping, lending, and earning yield. People who put their assets in liquidity pools earn rewards on their deposits.
What is the purpose and function of providing liquidity to a decentralized exchange?
Decentralized exchanges (DEXs) enable the permissionless exchange of any cryptoasset. Trading on DEXs is made possible by people adding liquidity to trading pairs. Unlike on centralized exchanges, anyone can add a cryptoasset trading pair to a DEX or strengthen an existing trading pair by providing liquidity. Without sufficient liquidity it is not possible to have a smoothly functioning exchange, so DEXs incentivize people to add liquidity by giving a portion of the DEX fees to liquidity providers.
What are the rewards for providing liquidity to Verse DEX?
By providing liquidity on Verse DEX, you will earn a proportional share of the fees generated on the trading pair you’ve funded. Specifically, 0.25% of trading volume is paid out to liquidity providers (LPs). This means that if the trading volume on your chosen pool is high, the rewards you earn will also be high. To see the current rewards:
Liquidity providers on Verse DEX are also eligible for Verse Farms rewards.
Is there a minimum amount required to contribute to liquidity pools on Verse DEX and earn yield?
There is no minimum amount required to earn from contributing to liquidity pools on Verse DEX. That being said, when you contribute to liquidity pools on Verse DEX you will need to pay the "gas" fees for each deposit transaction. When withdrawing from liquidity pools, including withdrawing your rewards, you will also need to pay transaction fees. Read more about gas and how transaction fees on Ethereum work here.
When deciding whether it makes economic sense for you to contribute to liquidity pools on Verse DEX, you will want to consider how long it will take to recoup your transaction fees. In general, the more cryptocurrency you contribute to a pool, and the longer your leave it there, the more awards you will accumulate. At a minimum, you should plan to contribute enough cryptocurrency to your pool and keep it there for long enough to cover your deposit and withdrawal costs.
To calculate how long it will take to recoup the transaction fees you incur for depositing and withdrawing from liquidity pools, consider the following:
The rewards being offered on your liquidity pool (varies over time)
The gas cost at the time of transaction (varies)
The amount of cryptocurrency you have contributed to the pool
Let's look at a simplified example. Imagine you contribute to the VERSE/ETH pool and the rewards on the pool remain constant at 5% APY. Imagine also that your deposit and withdrawal transactions are the equivalent of $10 in ETH each (for a total of $20). If you deposit $1000 in cryptocurrency to the pool, after 1 year your gross rewards would equal $50. Given that your transaction costs are $20 in total, you will have earned $30 in net profit over the 1-year period.
How to contribute to liquidity pools on Verse DEX and earn yield
In the app
From the app's home screen, scroll down and tap on "Earn."
Select the pool you'd like to contribute to (eg. VERSE/ETH).
Enter the amount of cryptocurrency to add to the pool, then tap "REVIEW." Note that you must enter equal amounts of both pool assets.
Confirm the transaction and you're done! You will receive liquidity pool (LP) tokens (eg. VERSE-X (VERSE/ETH) in your wallet. These LP tokens are like a receipt for your deposit; they represent your proportional ownership of the liquidity pool. You can later redeem these LP tokens for the underlying assets (eg. VERSE and ETH) in the pool plus your rewards. You can track your rewards in the Earn section of the app and withdraw your liquidity + rewards whenever you want.
On the web
In the “Pools” tab, select the pool you’d like to add liquidity to and hit “Deposit.”
Enter the amount you’d like to deposit. You can choose between manually depositing equal amounts of both pool assets or depositing one of the two pool assets only. To choose between these two modes, select either "Default Assets" or "Single Asset":
If you choose "Single Asset," Verse DEX will automatically convert half of that token to the other token in the pair, then deposit both into the pool. Read more about this feature here.
When you are ready, hit the “Confirm Deposit” button.
Confirm the transaction and you're done! You will receive liquidity pool (LP) tokens (eg. VERSE-X (VERSE/ETH) in your wallet. These LP tokens are like a receipt for your deposit; they represent your proportional ownership of the liquidity pool. You can later redeem these LP tokens for the underlying assets (eg. VERSE and ETH) in the pool plus your rewards. You can track your rewards in the “Pools” tab and withdraw your liquidity + rewards whenever you want.
Here's a video demonstrating how to deposit into liquidity pools to earn yield on Verse DEX on the web:
What is a liquidity pool token?
Liquidity Pool (LP) tokens are a type of digital asset that represents an individual's share in a decentralized exchange's liquidity pool. When you deposit assets into a liquidity pool on Verse DEX, you will receive LP tokens. Read more about LP tokens here.
What is impermanent loss?
Impermanent Loss (IL) refers to the unrealized opportunity cost that happens when, between the time you deposit tokens in a liquidity pool and the time you withdraw them, the price of one token in the pool changes relative to its pair. It’s an unrealized opportunity cost - ie. not a real loss - for two reasons. First, because it is measured against what the value of your deposited assets would have been had you simply held them (ie. had you not deposited them in the pool). This means that it’s entirely possible for the dollar value of your liquidity pool tokens to increase while you are still in an IL position. Second, it is unrealized, or impermanent, because the relative value of the tokens in the pool can return to the same ratio as when you deposited them. In other words, as long as you don’t withdraw your liquidity from the pool when the ratio is out of balance, your loss will not be realized.
So why do people still provide liquidity to DEXs if they’re exposed to potential losses? It’s because the yield that is paid out 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, yield for liquidity providers is a proportional share of 0.25% of the trading volume for the pair. In many cases, there is also the opportunity to stake liquidity pool tokens in exchange for additional rewards, which is known as yield farming. Liquidity providers on Verse DEX are currently eligible for Verse Farms rewards.