When you add tokens to a Liquidity Pool you will receive Liquidity Provider (LP) tokens in return and you will earn a share in the fees just by holding on to the LP Tokens.
As an example, if you deposited XOXO and AVAX into a Liquidity Pool, you'd receive XOXO-AVAX LP tokens. The number of LP tokens you receive represents your portion of the XOXO-AVAX Liquidity Pool. You may also redeem your funds at any time by removing your liquidity.
Providing liquidity is not without risk, as you may be exposed to impermanent loss.
Earning Trading Fees for Liquidity Providers
Providing liquidity gives you a reward in the form of trading fees when people swap tokens using your liquidity pool.
Whenever someone trades on HunnySwap, the trader pays a 0.3% fee, of which 0.18% will be added back to the Liquidity Pool of the swap pair they traded on.
There are 10 LP tokens representing 10 XOXO and 10 AVAX tokens.
1 LP token = 1 XOXO + 1 AVAX
Someone trades 10 XOXO for 9.97 AVAX.
Someone else trades 10 AVAX for 9.97 XOXO.
The XOXO-AVAX liquidity pool now has 10.018 XOXO and 10.018 AVAX.
Each LP token is now worth 1.00018 XOXO + 1.00018 AVAX.
To make being a liquidity provider even more worth your while, you can also stake your LP tokens to earn an additional yield on Hunny Farms, while still earning your 0.18% trading fee reward.
If you’re considering supplying liquidity to one of the liquidity pools in order to farm, it’s important to understand the effects of impermanent loss. For a great guide on impermanent loss, check out this article from Binance Academy.