When you add your token to a Liquidity Pool you will receive Liquidity Provider (LP) tokens and share in the fees.
LP Tokens #
As an example, if you deposited CAKE and BNB into a Liquidity Pool, you’d receive CAKE-BNB LP tokens.
The number of LP tokens you receive represents your portion of the CAKE-BNB Liquidity Pool.
You can also redeem your funds at any time by removing your liquidity.
Liquidity Providers earn trading fees #
Providing liquidity gives you a reward in the form of trading fees when people use your liquidity pool.
Whenever someone trades on Tethereum DEX, the trader pays a 0.25% fee, of which 0.17% is added to the Liquidity Pool of the swap pair they traded on.
- There are 10 LP tokens representing 10 CAKE and 10 BNB tokens.
- 1 LP token = 1 CAKE + 1 BNB
- Someone trades 10 CAKE for 10 BNB.
- Someone else trades 10 BNB for 10 CAKE.
- The CAKE/BNB liquidity pool now has 10.017 CAKE and 10.017 BNB.
- Each LP token is now worth 1.00017 CAKE + 1.00017 BNB.
To make being a liquidity provider even more worth your while, you can also put your LP tokens to work whipping up some fresh yield on the CAKE Farms, while still earning your 0.17% trading fee reward.
- Impermanent Loss
Providing liquidity is not without risk, as you may be exposed to impermanent loss.