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Users who contribute liquidity to liquidity pools are awarded liquidity pool tokens, sometimes referred as as liquidity provider tokens. These tokens serve as a receipt that entitles you to your initial bet and any interest that has accrued.
Additionally, you can borrow cryptocurrency with your LP tokens, transfer ownership of the staked liquidity, and compound interest in a yield farm. However, it’s crucial to realize that once you relinquish ownership of your LP tokens, you no longer genuinely possess the related liquidity.
What Does it Mean to Provide Liquidity?
The simplest definition of liquidity is the ease with which an asset can be traded without significantly changing price. A highly liquid asset is a cryptocurrency like Bitcoin (BTC), for instance. Without intentionally influencing its price, you can trade it across thousands of exchanges in practically any amount. Not all tokens, however, are fortunate enough to enjoy this degree of liquidity.
Liquidity might be a problem for smaller projects and decentralized finance (DeFi). For instance, the coin might only be accessible through a single exchange. Finding a buyer or seller who can fulfill your request may prove to be difficult as well. A solution to this issue is the liquidity pool model, also referred to as liquidity mining.
Users can exchange between two assets in a liquidity pool. The price is established by the ratio of the assets in the pool; market makers, takers, or an order book are not required. Liquidity providers are users who add a pair of tokens to the pool to make trading possible. Users who swap using their tokens are subject to a minor fee from them.
Therefore, while providing liquidity refers to making your assets available to the market, in the case of LP tokens, we are specifically referring to DeFi liquidity pools.
Be aware that just because an asset pair has a liquidity pool doesn’t necessarily suggest that there is substantial liquidity in the market. However, you won’t have to rely on someone matching your order because you may always trade utilizing the pool.
List of Top 5 LP Pools So Far
1. BTC – DFI / 33.84% APY
The most rewarding pool with highest APY is the BTC – DFI pool on Defichain network and it offers an amazing APY of 33.84% and it has a total value locked of 145M USD.
2. BNB – USDT / 33.56% APY
The second most rewarding pool; is BNB – USDT pool on Alpaca (BSC network) and it offers 33.56% which is a little bit less then the first LP pool. The BNB – USDT pool has a total value locked of 81M USD.
3. USDC – WETH / 26.29% APY
The third most rewarding pool is USDC – WETH pool on Uniswap (Ethereum network) offers a sweet 26.29% APY with a total value locked of 312M USD.
4. WBTC – WETH / 23.03% APY
The forth most most rewarding LP pool is WBTC – WETH on Uniswap (Ethereum network) and it offers 23.03% APY with a total value locked of 193M USD.
5. USDT – USDC / 9.48% APY
The last LP pool is the USDT – USDC pool on VVS (Cronos network) and its considered to be the safest one since you provide liquidity on two stablecoins. This pair currently offers a high APY of 9.48% and it has around 370M USD total value locked at this moment.
It’s worth debating whether you want to use your LP tokens the next time you contribute crypto liquidity to a liquidity pool on a DeFi network. A DeFi plan may include several steps beyond the first deposit into a liquidity pool. Instead of just holding onto your investments, consider your investment goals and risk tolerance to determine whether you should make further investments.
Disclaimer: The opinion expressed here is not investment advice – it is provided for informational purposes only. It does not necessarily reflect the opinion of EGG Finance. Every investment and all trading involves risk, so you should always perform your own research prior to making decisions. We do not recommend investing money you cannot afford to lose.