THORChain — Being a liquidity provider

Liquidity providers earn rewards in exchange for supplying their assets to the network. Their assets are added to pools which swappers use to exchange assets.

Providing Liquidity

Providing liquidity on THORChain creates an opportunity for holders of non-yield generating assets like BTC and BNB to earn a return on their investments. Liquidity providers deposit their assets into pools, thus owning a share of that pool. When other participants swap assets, they are charged fees and liquidity providers earn rewards proportional to their share of the pool.

Entering and Leaving a Pool

To deposit assets on THORChain, you need a compatible wallet with your assets connected to one of the many User Interfaces. There is no KYC or permission process needed.

Liquidity providers can add liquidity to any of the active or pending pools. The ability to use and withdraw assets is completely non-custodial. Only the original depositor has the ability to withdraw them (based on the address used to deposit the assets). The deeper the liquidity of a pool, the lower the fee needed (and reward) per swap. Deep pools generally have higher swap volume which compensates for the lower fees per swap, and on average, generate more fee revenue.

Withdrawing Assets

Liquidity providers can withdraw their assets at any time and without any cooldown period. The network processes their request and the liquidity provider receives their ownership percentage of the pool along with the assets they’ve earned. Similar to swaps, a small network fee is required whenever assets are deposited or withdrawn from the network.

Benefits

The main benefit for liquidity providers is that they are able to earn yields on non-yield generating assets like Bitcoin, Ethereum, Binance coin, etc.

Liquidity providers are rewarded for keeping their assets in THORChain. Income comes from block rewards and swap fees in a 50/50 ratio of RUNE and the pool’s connected asset. Rewards for liquidity providers are affected by the emission schedule and swap frequency, which are calculated with every block. Liquidity providers only realize their rewards when they take their assets back out of THORChain.

There are 3 main Factors affecting returns:

Proportion of transaction volume to pool depth — If there is high volume compared to the depth of the pool then there will be higher rewards available to liquidity providers. If there is low volume compared to the depth of the pool then there will be lower rewards available.

Share of the pool — If you have a large share of the pool, you’ll earn higher returns. If a liquidity provider has 1% of a pool they receive 1% of the rewards for that pool.

Fee size — fees are determined by the underlying blockchain and the rewards from fees are proportional to the fees charged. A chain with higher fees will generate higher rewards for liquidity providers.

Requirements and Risks

Liquidity providers must have assets to deposit in the network. They lend their assets to the network. These could be the native asset, RUNE, or external assets like Binance Coin, Bitcoin, Ethereum, etc. Liquidity providers don’t bear any real-world costs like node operators. In practice however, liquidity providers have 2 risks they need to take into account when weighing the rewards they could potentially get from providing liquidity:

Impermanent Loss — Normally, if the asset prices in the pool moves higher or lower than when you deposited them, you experience “Impermanent Loss”. This loss is only realized when you withdraw from the pool.

Network risks — If you are putting your tokens outside of your control, you are at higher risk than if you held them in a cold wallet. If you are providing liquidity, your pool share represents your tokens and is held by your keys in the network. The value of your pool share is susceptible to network risks. However, THORChain is regularly audited, has a proactive developer community and a generous treasury, but despite these measures, providing liquidity is still not as secure as a HODL strategy.

Feel free to hop into the TC University Discord to chat about this, or any other THORChain questions that you may have.

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