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What is Binance Liquidity Farming

2020-09-04 08:28
Click the video to learn more

What is Liquidity Farming?

Liquidity Farming is a liquidity pool developed based on the AMM (Automatic Market Maker) principle. It consists of different liquidity pools, and each liquidity pool contains two digital tokens or fiat assets.
You can provide liquidity in the pools to become a liquidity provider and earn transaction fees and flexible interest.
Also, you can swap two digital tokens or fiat assets in the liquidity pools easily.
Note: Liquidity Farming supports API functionality. For more information, please visit Liquidity Farming API Portal.

How many types of products does Liquidity Farming support?

There are two types of Liquidity Farming - Stable Investment and Innovative Investment.
  • Stable: Developed with a hybrid constant function automatic market-making system model to realize the transaction and pricing between two stable tokens, and provide a low slippage trading experience. The prices of the two tokens in the pool are affected more by exchange rate/token price fluctuations, and the market-making income is more stable than the Innovative products.
  • Innovative: Developed with a constant mean value automatic market-making system model to achieve transaction and pricing for two digital tokens or fiat currencies. The prices of the two tokens in the pool are affected by the exchange rate/token price fluctuations, and market-making returns fluctuate more greatly.
Before you start using Liquidity Farming, here are some definitions you should know:
  • Add: provide liquidity for the liquidity pools.
  • Redeem: remove your tokens from the liquidity pools.
  • Dual token pool: consists of two tokens.
  • Price (internal price): The swap price between the pair in the pool. The final price depends on the proportion of the pair in the liquidity pool and is calculated by a formula.
  • Portion: the pool portion you are expected to get after adding liquidity.
  • Portion of the pool: the estimated value of the pool portion that you are expected to get after this operation. .
  • Total yield: The total rate of return is calculated based on all current interest and all trading fees paid yesterday.
  • Current pool size: the composition of the pair in the current pool. When you add assets, you will also add them in proportion to the composition.
  • My Portion: After adding an asset to the liquidity pool, you will get a portion, it is different from the token you added. The portion is composed of two digital tokens or fiat currencies. The number of the two digital tokens or fiat will change in real-time based on the current pool size.
  • Total Yield: the latest reference rate of return for the trading pair.
  • Portion amount: the amount of token/fiat in the acquired portion.
  • Portion value: the total value of the portion acquired after adding assets.
  • Pool Portion Composition: Current composites of your portion.The number of the two tokens or fiat currencies will change in real-time based on the current pool size.
  • Cost per Portion: According to the cost price per portion calculated when you add it, priced in USD.
  • Portion Value PNL: calculated based on the current portion value minus the total cost price of the portion, priced in USD. Portion value is affected by multiple factors, including exchange rates, token price fluctuations, and impermanent losses, which can generate positive or negative returns.
  • Earnings: includes the Liquidity Farming fee income and liquidity rewards, priced in USD.

How to calculate total yield?

  • Total yield = (all current interest distributed yesterday + all trading fees of yesterday) / the end of yesterday's date (UTC+0 23:59:59) total pool value*365
  • Interest rate of return = all current interest paid yesterday / total value of the pool at the end of yesterday * 365
  • Trading fee rate of return = all trading fees paid yesterday / total pool value at the end of yesterday *365

How to calculate portion value?

  • Portion value = The number of two tokens/fiats in the portion composition * real-time exchange rates and denominated in USD.
  • Example:
User’s portion value = 100 USDT + 50 DAI
Real-time exchange rate: 1 USDT = 1.005 USD
1 DAI = 1.01 USD
Portion value = 100 USDT * 1.005 + 50 DAI * 1.01 = 151 USD

How to calculate last day yield?

  • Last day yield = Last day yield per portion * Last day portion held by the user for a full day (calculated by the minimum portion)
  • The calculation instructions for the minimum portion held by users for a full day:
  • The user’s portion at the end of the day before yesterday was 0, and the user’s minimum portion of yesterday is 0.
  • The user’s portion at the end of the day before yesterday was 100. Then the user added 50 portions yesterday and did not withdraw until the end of yesterday, so the minimum portion yesterday is still 100.
  • The user's portion at the end of the day before yesterday was 100. Then the user added 50 portions yesterday and redeemed 80 portions before the end of the period, so the minimum portion at the end of yesterday is 70.

How to calculate the Portion Value PNL?

  • Portion Value PNL = portion value - (cost price per portion * number of portions)
  • PnL ratio (%) = Portion Value PNL/portion value

Is Liquidity Farming a guaranteed investment?

No.
Possible losses may be caused by:
  • Fluctuations in token prices or fiat exchange rates, which will affect the value of portions. To further understand the risks, please refer to Impermanent Loss Explained.
  • When a large amount of a single token is added or redeemed, the value of the portion will be affected and lost due to excessive slippage.
  • Frequently adding or redeeming tokens.

When do I need to pay transaction fees when using Liquidity Farming?

  • Making a swap in [Trade] - [Swap Farming]
  • Adding a single token on [Earn] - [Liquidity Farming] - [Add]
  • Redeeming a single token on [Earn] → [Liquidity Farming] - [Redeem]

How to Add or Redeem Liquidity?

When you add liquidity, you can:
  • Choose dual tokens to add. The system will automatically display the amount of tokens to add according to the current pool size.
  • Choose a single token to add. The system will swap the token you added into the other token of your chosen pair based on the current portion composition ratio in the pool. Transaction fees will incur during the conversion, and large transactions may also cause higher slippage and loss.
When you remove liquidity, you can:
  • Choose dual tokens to redeem. The system will allocate the two tokens back to your Spot Wallet according to the pool portion and portion composition.
  • Choose a single token to redeem. The system will swap the token you choose to redeem into the other token based on the current portion composition ratio in the pool. Transaction fees will incur during the swap, and large transactions may also cause higher slippage and loss. When the slippage is too high, the system will send an alert on the page.
Slippage and the loss of slippage:
Slippage refers to the spreads between the actual trading price and the price while placing the order.
You can set the slippage tolerance of transactions on the [Liquidity Farming]page. You can only swap when the slippage is within the set range.
When a single token is added or redeemed in large amounts, slippage may also incur and affect the value of the portion. In this case, the system will send you an alert before confirming the swap.