Liquidity Provider Staking: Introduction & Guide

Let’s explore the basics, risks, and how to get started with liquidity provider staking. If you are past the basics and ready to get started, you can jump right to the “Guide” section. Please remember that investing in any cryptocurrency assets is risky and this article should not be taken as financial advice.

The Basics

Liquidity pools are an essential component of the decentralised finance (DeFi) ecosystem. They are a collection of funds locked in a smart contract used to facilitate decentralized trading, lending and many more functions. They allow people to buy and sell a token. Most decentralised exchanges (DEXs) allow anyone to create a liquidity pool with a 50/50 value ratio. This means that if a pool is created with two tokens each side of the pool holds 50% of the value.

For example, adding 100 FACTR and 10 BUSD tokens, results in 100 FACTR = 10 BUSD tokens, therefore 1 FACTR = 0.1 BUSD.

Does this mean that if you have 10 BUSD you can buy 100 FACTR tokens from this pool at 0.1 BUSD each? No, because there is an automated market maker that uses algorithms to determine the price when users trade tokens. The more tokens a user buys the higher the price will be per token. The price per token will change depending on how much liquidity there is and how many tokens the user wants to buy or sell.

A liquidity provider (LP) must be incentivized in some way to create a liquidity pool. When an LP adds liquidity to a pool they receive LP tokens that represent their allocation of the pool. In exchange for providing their funds, they can earn trading fees from the trades that happen in their pool, proportional to their share of the total liquidity.

On the PancakeSwap DEX, every trade has a transaction fee of 0.25%. A portion of the fee is collected by the platform as revenue, but 0.17% out of the 0.25% is added to the liquidity pool of the pair that is being traded. Subsequently, the value of LP tokens increases as trading volume rises due to fees.

What is the risk?

The risk of providing liquidity is impermanent loss (IL). IL is the difference between the value of the tokens in a liquidity pool and the value of the tokens if they were held in a wallet. The loss does not become permanent until the LP tokens are removed from the liquidity pool. This may be easier to understand with an example. Please note the example below is simplified and should not be used to calculate IL in real-life scenarios.

How does impermanent loss work?

Trader X and Trader Y both have $10 of FACTR and $10 of wBNB (wrapped BNB). Trader Y decides to hold while Trader X decides to provide liquidity to the FACTR/wBNB pair.

In the example shown above, IL is an opportunity cost. Even though Trader X has made profit, they have missed out on an extra $20.

Impermanent Loss: Simplified Maths Example

For the purpose of the example earned and paid trading fees will be excluded. We will also use a FACTR/BUSD pair to make the dollar valuation of the tokens easier to calculate. The actual FACTR pair is with wBNB.

The ‘trading’ that occurs inside the example does not reflect how liquidity pools and automated market makers work in real life. The numbers have been chosen to simplify the explanation of IL.

  • Trader X adds 500 FACTR and 10 BUSD to a liquidity pool on PancakeSwap.
    Total token value = $20
    FACTR price = $0.02.
  • The liquidity pool has a total of 5,000 FACTR and 100 BUSD.
  • Trader X has 1 out 10 LP tokens, which accounts for 10% of the pool.
  • Trading occurs in the pool and it now holds 2,500 FACTR and 200 BUSD.
  • If Trader X redeems their 1 LP token, they will receive 250 FACTR and 20 BUSD.
    Total token value = $40.
    FACTR price = $0.08.

If Trader X had held their tokens in their wallet as the price increased from $0.02 to $0.08, what would their tokens be worth now?

(500 FACTR x $0.08/FACTR) + (20 BUSD x $1/BUSD) = $60.

IL is $20. If Trader X had simply held those tokens, their tokens would be worth more. This loss will only become permanent if Trader X redeems their LP token and sell the assets.

As mentioned this example did not take into account the trading fees earned by the LP providers, but unless the trading volume was unreasonably high the fees would not have compensated Trader X for their loss. IL is the biggest factor that disincentives traders and holders from providing liquidity. This is where LP staking helps.

What is LP Staking?

LP staking is a valuable way to incentivise token holders to provide liquidity. When a token holder provides liquidity as mentioned earlier they receive LP tokens. LP staking allows the liquidity providers to stake their LP tokens and receive FACTR tokens as rewards. This mitigates the risk of impermanent loss and compensates for the loss.

At the time of writing this article LP stakers are earning over 320% APY on MANTRADAO. This is an extremely high APY, but it will fall as more LP tokens are staked. The early LP stakers will receive the most benefits. For those that want to take advantage of this opportunity, please see below a step-by-step guide on how to provide liquidity and stake the LP tokens.

Guide to LP Staking FACTR/wBNB

DISCLAIMER: This is not financial advice. This article serves only as a guide to stake LP tokens. Please contact a financial advisor for advice on how to best manage your money.

To provide liquidity, you must have an equal value of the tokens in the pair. At the time of writing this article, FACTR is trading at a price of ~$0.084 and BNB is trading at a price of ~$417.66 on PancakeSwap. Let’s just say you have $200 that you want to use to provide liquidity, then you need $100 of each token. At the prices mentioned, that would be approximately 1190 FACTR and 0.2394 BNB. You would also need extra BNB for the transaction fees, 0.03 BNB should be more than enough.

1Go to PancakeSwap and at the top of the page select ‘Liquidity’. You can see this circled in green in the image below.

2Once you are on the liquidity page connect your wallet and select ‘Add Liquidity’. In this example, we are adding liquidity for the FACTR/BNB pair. It’s actually a FACTR/wBNB pair, but the exchange will automatically convert the BNB to wBNB for you. Select the tokens and the amounts, click ‘Supply’ and you will be prompted to pay for a transaction.

3Once this transaction is complete you will automatically receive LP tokens in your wallet. Go to the MANTRADAO staking page which you can find here. Ensure you have selected the BSC network or you won’t be able to find the pair.

Scroll down to find the FACTR/BNB pair and select ‘Start Stake’.

4Select ‘Stake’ and you will see the visual displayed below. Select ‘Preapprove’ where you will be prompted to pay a transaction fee. Then select ‘100%’ followed by ‘Confirm Staking’ where you will be prompted to pay for another transaction. Each button is circled in green below.

5Once this transaction is complete you will have successfully staked your LP tokens. Unstaking your tokens is instant and you can redeem them on PancakeSwap at any time. Once you unstake you will stop earning rewards. Claiming rewards has an 8 day withdrawal period.

This concludes the guide to FACTR/BNB LP staking on MANTRADAO. Although this should also be a useful document for LP staking of any pair on MANTRADAO. If you have any other questions or concerns please join the Discord server to get in touch with us.

Happy LP staking!