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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. Just like any other DeFi swap, 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 and Innovative.
  • 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 rewards for liquidity providers 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 rewards for liquidity providers fluctuate more greatly.
Before you start using Liquidity Farming, here are some definitions you should know:
  • 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.
  • Add: provide liquidity for the liquidity pools.
  • Remove: remove your tokens from the liquidity pools.
  • 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 share of the pool that you are expected to get after adding liquidity.
  • Slippage: the estimated percentage that the ultimate executed price of the swap deviates from the current price due to trading amount.
  • Total yield: estimated annualized yield a user can expect to receive for providing liquidity in this pool.
  • My Portion: Once you add liquidity to a liquidity pool, you will get a portion which is different from single token you added. The portion is composed of two digital tokens. The number of the two digital tokens 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 is the total yield calculated?

  • Total yield = 365* (rewards distributed in past 24 hours + trading fees rewards in past 24 hours ) / total pool value in the past 24 hours

How is the portion value calculated?

  • Portion value = The number of two tokens in the portion composition * real-time exchange rates, 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

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. You can also use Impermanent Loss Calculator to estimate it.
  • 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.

Where is the trading fee coming from?

  • 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 do I Add or Remove Liquidity?

When you add liquidity, you can:
  • Add two tokens - The system will automatically display the amount of tokens to add according to the current pool size.
  • Add single token. - 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:
  • Remove two tokens. - The system will allocate the two tokens back to your Spot Wallet according to the pool portion and portion composition.
  • Remove single token. - 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.