In this guide, we will explain how to choose a liquidity pool to join, the entire process of participating in a liquidity pool and then staking your share to farm SUSHI tokens.
Please note that liquidity providing (“LPing”) and Yield Farming are highly risky and should not be attempted by players who are new to cryptocurrencies. There is a chance you may lose all of your tokens and it is generally impossible for the team to fix any mistakes. One of the main risks is known as Impermanence Loss (IL). Please see the section below in this blog on Impermanence Loss.
📢 Before we begin, let’s talk a little bit about LPing and Yield Farming
LPing is about users adding funds to a liquidity pool with their crypto assets to facilitate trading on a platform. This means they might earn rewards for providing the liquidity.
Liquidity pools help decentralized exchanges (DEXes) that use automated market maker-based systems (AMMs) to allow trading of illiquid trading pairs with limited slippage. This is instead of using traditional order book-based trading systems, such as exchanges, that require funds to be held for every asset in every trading pair to allow trades to be executed.
To engage in LPing, users contribute 2 tokens as a pair which must be balanced 50%-50% by value. Liquidity providers earn a 0.25% fee on all trades proportional to their share of the pool. Fees are added to the pool, accrue in real time and can be claimed by withdrawing their liquidity.
As mentioned above, providing liquidity incurs a risk of losing your tokens via Impermanence Loss. Please see the IL section in this blog. You can see an overview of the Liquidity Providing already happening on SushiSwap at the following link: WETH/WNCG analytics.
Yield “farming” generally means giving something to a platform (usually by staking assets) to receive rewards (e.g. an annualized percentage yield (APY)). Often this entails adding liquidity to a network and then additionally staking the liquidity provider tokens, or adding liquidity to a market for borrowing and lending. SushiSwap encourages users to provide the liquidity required for a decentralized exchange to be able to facilitate swaps between various tokens.
Don’t forget to install and set up your MetaMask for those who don’t have it in order to proceed with the Liquidity Pool.
🧐 How to join a Liquidity Pool:
- Go to the pool page: https://app.sushi.com/pool
2. Click “Connect to a wallet” and select a wallet (e.g. MetaMask). Click the “Add” button and then search for the pair you want. This will insert the pair you want to join, i.e. WNCG / WETH. Note that WETH is a wrapped form of Ether (ETH), the two are roughly equivalent. Then enter the amount of WNCG you want to inject into the pool, and the needed ETH will be automatically calculated. If you have ETH instead of WETH, click on the WETH label and select ETH from the options.
3. After finding the pairs you want to join insert the amount of tokens to the liquidity pool, and click on the “Confirm Adding Liquidity” button. In exchange for adding WETH and WNCG tokens to the pool, you will receive WNCG/WETH pool tokens to prove you own a part of the pool. These are known as Sushi Liquidity Pool Tokens (SLP) tokens.
4. Once confirmed, you will be able to add liquidity to the pool. Click the “Confirm Supply” button and proceed with the transaction.
Important: Choosing a liquidity pool would require careful research before implementation, thus we suggest each individual to do their own thorough research before joining a pool. This means weighing the amount of risk you are willing to take based on your current situation. No one is advised or forced to join the liquidity pool. We kindly players ask to double-check all the instructions and implementations in advance. Keep in mind that there will be gas fees upon each transaction!
📈 Staking Liquidity Tokens (“Farming” )
- Once you have your SLP tokens, head to the Farm page, select 2x Rewards Farm in the left hand menu, and then click on the wNCG/wETH Farm. You will see your SLP token balance. Select MAX to stake all of your available SLP tokens.
2. If this is your first time staking, you will have to approve SushiSwap to interact with your SLP tokens before you finalize the transactions. Once you are done, click the “Confirm” button in MetaMask, and you would be able to see the total sum of your SLP tokens staked on the right side.
3. If you want to claim the current rewards, click “Harvest” and confirm the transaction in MetaMask.
🛑 Impermanent Loss: A big risk in Yield Farming
Impermanent Loss has been described as the difference in the value of your tokens value in a liquidity pool versus the value of your tokens if you had held them individually in your wallet. If one of your tokens skyrockets on traditional markets, your assets on SushiSwap do not automatically update to match. At this “time lag” stage, there is an opportunity for traders to buy your assets in the pool at a lower price and resell on a centralized exchange at a higher price, realizing an arbitrage gain. That gain could have been yours! Instead, this stolen opportunity can be classified as your impermanent loss. This is one of the risks you take as a Liquidity Provider (LP.)
The best-case scenario for an LP is when there are many transactions in the pool and the price of each token does not have significant price fluctuations. The more transactions, the more share of the transaction fees you will earn. If you are going to become an LP and earn some rewards, it is best to consider the popularity of the pool and your confidence in the price’s stability.
🔌 Removing Liquidity
If you want to remove the liquidity from the pool here is a step-by-step guide on how to do so.
- Go to : https://sushi.com
- Connect your wallet to SushiSwap (Make sure you have some Ether tokens to cover gas fees!)
- Click the Liquidity tab and click on “Your Liquidity Positions” button. Specify the coins or tokens of a pool you want to remove the liquidity from.
- Check the number of coins/tokens to return. Then, press the “Remove” button. Note, that this may vary with the initial amount you originally deposited.
5. Enter the percentage (with 100% meaning withdrawal of all liquidity you provide) and press the “Approve” button.
Your liquidity will be withdrawn from a given pool upon tx confirmation. After, the coins/tokens will return to your balance and become freely available.