Liquidity Pools and Yield Farming

What are Liquidity Pools?

Liquidity Pools are contracts that allow multiple entities to provide liquidity for specified assets.

Liquidity Providing is the act of providing defined amounts of assets that are bound by value in a pool. When you provide these assets for trading, you will receive LP tokens.

LP Tokens represent the percentage of the pool that your assets consist of (This changes also, depending on the value of the Liquidity Pool). You earn trading fees that are proportional to your ownership stake in the Liquidity Pool. Sometimes you can claim the fees immediately, and sometimes they are paid out when you trade your LP tokens for your assets in the pool.

Most of these pools are percentage or ratio based.

For example, if MONKE was valued at $10.00 and you wanted to join a 50/50 USDC-MONKE pool, you would provide 10 MONKE coins ($100.00) and 100 USDCoins ($100.00) to the pool, for a total of $200.00. The value of the assets must equal the percentages the pool requires (Here, it is 50%/50%).

As assets are bought and sold on an exchange, your ownership of USDC and MONKE will change according to the corresponding value, but they will always maintain the 50/50 ratio in value (if MONKE goes from $10.00 to $20.00 then you would lose 2.5 MONKE and gain 50 USDC, as the additional value in MONKE has to be sold in order to balance the USDC side).

What is Yield Farming?

Oftentimes, Liquidity Pools will provide incentives (Such as additional MONKE) in order to entice Liquidity Providers to place their assets within the pool. These incentives increase the yield on the pool (beyond the yield earned from fees alone). The more MONKE is worth, the higher the APY.

By placing your Liquidity Pool Tokens in the Jungle at http://monkefarm.finance, you earn these incentives in addition to the fees paid to you by the pool. This is the act of "Staking" your LP tokens.

APY is a term used to describe the amount of rewards based on the price of the incentive and the fees earned if the current price was consistent over an entire year. APY's change quickly, but can be used as a way of finding underserved pools (as the fixed number of incentive coins are distributed to the members of the pool proportional to their pool ownership).