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PulseX is the most liquid DEX on PulseChain, where users can exchange tokens, add liquidity, and farm tokens. You can do all this while remaining in full control of your assets the whole time. Adding liquidity is one of the main ways to earn a yield on your tokens. Let’s see how it works.
What is a liquidity pool
A liquidity pool is a pool of funds locked in a smart contract. These pools are typically created to facilitate trading and lending activities without relying on traditional intermediaries such as banks or exchanges. They enable the seamless exchange of assets and the provision of liquidity for various trading pairs. The funds in a liquidity pool are contributed by users who deposit their assets into the pool, and they receive pool tokens in return. These tokens represent their share of ownership in the pool.
In a typical liquidity pool, assets are paired together, such as Ether (ETH) and a stablecoin like Dai (DAI), to create a trading pair. The pool’s smart contract algorithmically determines the exchange rate between the two assets based on the supply and demand dynamics. When users trade or swap one asset for another within the pool, the smart contract automatically adjusts the asset balances and exchange rates.
LPs play a vital role in liquidity pools. By depositing their assets into the pool, LPs earn trading fees or interest generated from the pool’s activities. The fees are usually distributed proportionally to LPs based on their share of the pool. However, providing liquidity involves risks, such as impermanent loss, where the value of deposited assets may fluctuate compared to simply holding them.
Providing liquidity on PulseX
PulseX v2 allows users to add liquidity to a pool and earn a 0.22% trading fee on all trades made for that token pair, proportional to their share of the liquidity pool. This is one way to create passive income on PulseX from your tokens.
Things you can do on PulseX
Trade
- Exchange – Trade your PRC20 tokens
- Liquidity – Add liquidity, Liquidity providers earn a 0.22% trading fee on all trades made for that token pair, proportional to their share of the liquidity pool.
Earn
- Farms – Stake LP tokens and earn Incentive token
- Pools – PLSX Pools Stake PLSX and earn other tokens
More
- PulseX Info & Analytics – Overview, Pools and Tokens Dashboard.
Earning fees as passive income isn’t, however, as straightforward as it seems, and it’s important to first know what impermanent loss (IL) is.
When liquidity providers deposit assets into a liquidity pool, they usually provide an equal value for both assets in a trading pair. As the assets are held in the pool, their prices can fluctuate relative to each other. If the price ratio of the assets changes significantly during the time they are in the pool, an impermanent loss occurs.
It’s “impermanent” because the loss is not permanent but rather a result of temporary price movements. It becomes permanent only if the funds are withdrawn while the loss is still in effect.
To avoid impermanent loss, it’s better to pair tokens that are bound within a range in terms of a ratio within that pair. The chances of incurring IL for tightly locked tokens are small.
PulseX: Difference between V1 and V2
PulseX has two different versions of liquidity pools. This is due to a deflationary bug in v1. As a consequence, v1 liquidity pools pay no transaction fees to liquidity providers; however, the liquidity pool tokens (PLP), which are given for providing liquidity, can be staked in the PulseX farms to provide owners with free INC and other tokens.
By adding liquidity to the pools on v2 of PulseX, users can earn 0.22% of all trades on a pair proportional to the share of the pool. Fees are added to the pool, accrue in real time, and can be claimed by withdrawing liquidity. V2 has no farms, so the user is faced with a choice between passive income from providing liquidity on V2 or farming on V1.
How to provide liquidity on PulseX v1
As an example, we show how to provide liquidity to a PLS/HEX liquidity pool on v1 of PulseX.
Here’s how:
STEP 1: Access the PulseX Interface
Make sure you are using a wallet that supports PulseChain network and has some funds in both of the tokens you want to add to the liquidity pool.
STEP 2: Connect Your Wallet
This allows the PulseX interface to access your tokens and perform transactions on your behalf.
STEP 3: Navigate to the “Liquidity” Section:
Once your wallet is connected, navigate to the “Liquidity” section under the “Trade” tab.
You’ll be presented with a choice:
- Find other LP Tokens – Import a Pool
- +Add Liquidity – Liquidity providers earn a 0.22% trading fee
STEP 4: Toggle button to V1
Toggle the PulseX version button to V1. If you provide liquidity to v1, you won’t earn trading fees, but you’ll be able to stake your liquidity pool tokens and farm them for INC and other tokens.
STEP 5: Select the Tokens to Add:
Choose the two tokens you want to add to the liquidity pool. You should have both tokens available in your connected wallet.
Once you click on “Balance” the calculation of the other token will be automatically handled by the system.
STEP 6: Confirm spending cap
Once you click the “Enable HEX” button, you will be prompted to confirm spending cap request in your MetaMask.
STEP 7: Confirm the Supply
Once you’ve approved the transactions, confirm the supply of liquidity by clicking the “Supply” button. This will create a liquidity pool and mint liquidity tokens for you.
STEP 8: Confirm the Final Transaction
Review and confirm the final transaction, which will involve creating the liquidity pool and minting liquidity tokens. This will be a separate transaction from the approval steps.
STEP 9: Wait for Confirmation
After the transaction is submitted, you will need to wait for it to be confirmed on the Pulsechain blockchain. You can monitor the progress on Pulsechain or your wallet’s transaction history.
STEP 10: Add Liquidity Pool Tokens (PLP) to Metamask
Once the transaction is confirmed, you will receive PLP (liquidity provider) tokens, representing your share of the PLS/HEX liquidity pool. These tokens can be used to farm INC and other tokens on PulseX.
For instructions on how to stake and farm on PulseX read our guide.
How to provide liquidity on PulseX v2
As an example, let’s see how to provide liquidity to a PLS/JACK liquidity pool. JACK is a token with a buy and burn mechanism where for every buy or sell a tax of 1% is applied. This tax is used to buy pXEN from PulseX. The tokens are then added to the burn pool which can be called by the user.
We add liquidity to the PLS/JACK pool and pair them together.
Here’s how:
STEP 1: Access the PulseX Interface:Make sure you are using a wallet that supports PulseChain network and has some funds in both of the tokens you want to add to the liquidity pool.
STEP 2: Connect Your Wallet:This allows the PulseX interface to access your tokens and perform transactions on your behalf.
STEP 3: Navigate to the “Liquidity” Section:
Once your wallet is connected, navigate to the “Liquidity” section under the “Trade” tab.
Click ‘Add Liquidity’
- Find other LP Tokens – Import a Pool
- +Add Liquidity – Liquidity providers earn a 0.22% trading fee
STEP 4: Toggle button to V2
Toggle the PulseX version button to V2 so you can earn a fee share of 0.22% on all the transaction.
STEP 5: Select the Tokens to Add:
Choose the two tokens you want to add to the liquidity pool. You should have both tokens available in your connected wallet.
In our example, we choose PLS and JACK.
STEP 6: Choose the amount of the tokens you want to add.
Once you click on “Balance” the calculation of the other token will be automatically handled by the system.
STEP 7: Confirm spending cap
Once you click the “Enable JACK” button, you will be prompted to confirm spending cap request in your MetaMask.
STEP 8: Confirm the Supply
Once you’ve approved the transactions, confirm the supply of liquidity by clicking the “Supply” button. This will create a liquidity pool and mint liquidity tokens for you.
STEP 9: Confirm the Final Transaction
Review and confirm the final transaction, which will involve creating the liquidity pool and minting liquidity tokens. This will be a separate transaction from the approval steps.
STEP 10: Wait for Confirmation
After the transaction is submitted, you will need to wait for it to be confirmed on the PulseChain blockchain. You can monitor the progress on PulseChain or your wallet’s transaction history.
STEP 11: Add Liquidity Pool Tokens (PLP) to Metamask
Once the transaction is confirmed, you will receive PLP (liquidity provider) tokens, representing your share of the liquidity pool. These tokens can be used to withdraw your liquidity from the pool or to claim trading fees earned by the pool.
Great work! You’ve successfully provided liquidity for PLS/JACK and added PLP to your Metamask wallet.
Richard Heart has also a few things to say about providing liquidity and farming so make sure you read that:
Choosing a good trading pair
How to choose a trading pair for a liquidity pool:
- Look for assets that have significant trading volumes and user demand. Popular trading pairs tend to attract more users and generate higher trading volumes, which can result in higher rewards.
- Pairs involving stablecoins like DAI, USDC, or USDT are often preferred by traders and liquidity providers due to their relative stability compared to volatile cryptocurrencies. Stablecoin pairs are a low-risk option for those seeking stable returns through fees and minimizing the impact of impermanent loss.
- Pair assets that have a strong correlation in their value. For example, pairing WETH with PLS can be a good choice, as they tend to have interdependencies and can capture the overall growth of the PulseChain ecosystem.
Other DEXes to provide liquidity to
PulseX stands out as the most liquid DEX on PulseChain. However, a notable limitation is that users currently cannot simultaneously provide liquidity and engage in farming activities.
Several other DEX platforms have successfully implemented this dual functionality, allowing users to both provide liquidity and farm tokens. Some of these DEXes include:
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