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This is the first in a series of articles, where I’ll take you on a journey exploring Thorchain’s liquidity pools. After reading all articles you should be intimately familiar with providing liquidity on Thorchain. You will possess the knowledge to earn a yield on your favorite crypto assets by being a liquidity provider.
Liquidity pools are deposits which make it possible for traders to swap assets. Liquidity providers provide these deposits, by adding their funds to the various liquidity pools. In exchange liquidity providers are compensated with block rewards and swap fees, they earn a yield in return. Liquidity pools are used by traders to swap one asset for another, they pay a network and a slippage fee.
Fees generated by the pools can be divided into two categories.
Block rewards come from Thorchain’s own rewards emissions and are paid to every pool which has processed a swap in that block. The more swaps were performed, the higher the fee is relative to the other pools. If no swaps were made in a block, the block rewards are shared by all the active pools.
Slippage fees are based on the amount of slippage a swap accrues. The amount of slippage depends on the depth of the pool and the volume of the swap. The deeper a pool, the lower the slippage fee. The bigger the volume of the swap, the higher the slippage fee.
How fees are generated
Fees are generated by traders every time they make a swap. The height of the fee paid depends on the volume of the swap relative to the depth of the pool. When the swap is bigger, the slippage is greater which is advantageous for liquidity providers.
The vast majority of fees will likely be generated by arbitrage bots. They are an integral part of the system. These bots make sure the pool’s prices reflect the appropriate market value, by adding and removing funds from the pools and selling/buying on other exchanges to earn a profit.
Rewards are paid out every block, which is around 5 seconds. Liquidity providers receive their rewards in RUNE and the pool’s connected asset. For example, someone who added funds to the RUNE:BTC pool will receive rewards in RUNE and BTC. The rewards are added to the liquidity provider’s pooled funds.
See the video below for a visual explanation of the basic concepts of BEPSwap.
How to Become a Liquidity Provider
To become a Liquidity provider, you will need RUNE and an asset of your choice which is listed on Thorchain. BEPSwap is the current interface to interact with Thorchain. To obtain RUNE or an asset of your preference you can either swap it on BEPSwap or another exchange.
To interact with Thorchain you’ll need a wallet, I recommend using Trustwallet. You can download Trustwallet on your phone. Connect your wallet with BEPSwap by clicking on “add wallet” in the top right of the screen (see image below). Select “walletconnect” and scan the QR code with your Trustwallet app. Approve the connection on your phone. Your wallet is now connected.
Look for the pool you’d like to add liquidity, click “manage”. Make sure you select “Add (your asset) + RUNE”. Now move the slider to select the amount you want to add. Once you’ve selected the correct amount, drag the slider below to the right to add your funds to the pool. Confirm the transaction with the wallet on your phone. You’ve now added liquidity to the pool. See the images below for clarification.
To withdraw your funds from a pool you always have to wait 24h after you last added assets to that particular pool. After that you can withdraw your assets at any time. Look for your pool on BEPSwap, click “manage”. Now select the tab “withdraw” and select the amount of funds you’d like to withdraw. Drag the slider to the right and confirm the transaction on your phone. Your assets will appear in your wallet shortly.
You can withdraw a maximum of 10% of the pool’s assets. If you own a larger share of the pool, withdraw smaller chunks (<10%) multiple times.
How to track your returns
The community built a few different tools to track returns. I recommend using at least one of them. They will help you understand how the pools function in different situations and help you gain valuable insights. These tools are still being tested; bugs might be present. Nonetheless they’re a must for every serious LP:
Another valuable tool which deserves a mention is runedata.info. This tool shows you the historical performance of each individual pool and compares it against holding either asset or both. You can also see your future returns. In a future article we’ll explore these tools in-depth.
In the next article we’ll take an in-depth look at how liquidity pools function and how liquidity providers can take advantage of this knowledge to earn greater, more stable and/or less risky yields.
If you’d like to read more articles/guides about Thorchain check this Medium page out.