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 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
- 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.
- Farms – Stake LP tokens and earn Incentive token
- Pools – PLSX Pools Stake PLSX and earn other tokens
- 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.
How to provide liquidity on PulseX
Let’s see how to provide liquidity to a PLSX/PLS liquidity pool. PLSX is PulseX’s token, which has a buy and burn mechanism where for every $1 billion of volume, there’s going to be $600k of PLX bought from the market and burned, permanently decreasing the total supply of the token.
We add liquidity to the PLSX/PLS pool and pair them together because of the close ratio.
We currently have 1 PLS for 2.09631 PLSX, and this ratio doesn’t change significantly, which makes it a good pair that may not suffer a significant impermanent loss. When you pair the two tokens, you will receive pool tokens (PLP), representing your total share in the fee pool and giving you a proportional amount of fees. When someone buys PLSX using PLS, they will pay a fee in PLS, and you will end up with more PLS, and vice versa.
Click ‘Add Liquidity’
- Find other LP Tokens – Import a Pool
- +Add Liquidity – Liquidity providers earn a 0.22% trading fee
Select a currency – PLS, PLSX, HEX, INC..
Enable PLSX to be spent in metamask. Set a spending limit.
Next ‘Confirm Supply’
Approve the transaction in metamask
Add PLP to Metamask. PLP = PulseX LP Token, it represents your LP position.
Great work! You’ve successfully provided liquidity for PLS/PLSX and added PLP to your Metamask wallet. Now, if you want, you can stake your PLP and earn an incentive token. Read our guide on how to farm your PLPs.
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.
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