When you add your token to a liquidity pool, you will receive Liquidity Pool (LP) tokens.
As an example, if you deposited BABY and USDT into a liquidity pool, you would receive BABY-USDT LP tokens.
The number of LP tokens you receive represents your portion of the BABY-USDT liquidity pool.
You can also redeem your funds at any time by removing your liquidity.
Providing liquidity is not without risk, as you may be exposed to impermanent loss.
It’s not all bad for liquidity providers as you will also be given a reward in the form of trading fees. For example, whenever someone trades BabySwap, the trader pays a 0.3% fee, of which 0.15% is added to the liquidity pool of the swap pair they traded on.
- 10 LP tokens are representing 10 BABY and 10 USDT tokens.
- 1 LP token = 1 BABY + 1 USDT
- Someone trades 10 BABY for 10 USDT
- Someone else trades 10 USDT for 10 BABY.
- The BABY/USDT liquidity pool now has 10.015 BABY and 10.015 USDT.
- Each LP token is now worth 1.00015 BABY + 1.00015 USDT.
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 Yield Farms while still earning your 0.15% trading fee reward.