Liquidity pools allow decentralized trading of cryptocurrencies to happen without the need for a centralized authority to hold reserves of both assets.
Adding liquidity to the trading pool on Proton Swap allows you to earn a percentage of any fees generated by the use of your tokens. You need to add the same value in USD to both sides of the pair.
Liquidity Providers earn 0.2% of every trade; the amount of crypto that you earned of this 0.2% is proportional to the amount of cryptocurrency that you provide to the traded pool.
For example, let’s say there is a liquidity pool already in existence for the trading pair XUSDC and XPR, and the pool currently stands at 9,000 XUSDC and 900,000 XPR. You enter this liquidity pool, adding 1,000 XUSDC and 100,000 XPR. Since you’ve now added 10% of that liquidity pool’s total value, you’ll earn 10% of the 0.2% of fees generated by that pool.
You can withdraw from the farms and liquidity pools at any time, there is no lockup period.
Impermanent loss can occur when the price of your tokens changes compared to when you deposited them in the pool. The larger the change is, the bigger the loss. You can learn more about impermanent loss in this article.
Some pools also have a farming option, allowing you to stake the liquidity pool tokens and earn an APR. More on that in the farming section.