How to earn passive income at HIVE using liquidity pools
Hello, beautiful friends of Hive Blockchain! I hope you all are doing well and feeling healthy. I am also good and enjoying my life. It's Sunday 23rd of January in the Philippines. Today I am sharing with you how you can earn passive income using the TribalDex liquidity pools.
So to start, what is a liquidity pool?
A liquidity pool is a collection of funds locked in a smart contract. Liquidity pools are used to facilitate decentralized trading, lending, and many more functions we’ll explore later.
Liquidity pools are the backbone of many decentralized exchanges (DEX), such as Uniswap, Binance Smart Chain, Tribaldex. Users called liquidity providers (LP) add an equal value of two tokens in a pool to create a market. In exchange for providing their funds, they earn trading fees from the trades that happen in their pool, proportional to their share of the total liquidity.
As we’ve mentioned, a liquidity pool is a bunch of funds deposited into a smart contract by liquidity providers. When you’re executing a trade on an AMM, you don’t have a counterparty in the traditional sense. Instead, you’re executing the trade against the liquidity in the liquidity pool. For the buyer to buy, there doesn’t need to be a seller at that particular moment, only sufficient liquidity in the pool.
When you’re buying the latest food coin on Uniswap, there isn’t a seller on the other side in the traditional sense. Instead, your activity is managed by the algorithm that governs what happens in the pool. In addition, pricing is also determined by this algorithm based on the trades that happen in the pool.
Of course, the liquidity has to come somewhere, and anyone can be a liquidity provider, so they could be viewed as your counterparty in some sense. But, it’s not the same as in the case of the order book model, as you’re interacting with the contract that governs the pool. And that is the basic explanation for a liquidity pool.
Having explained what are liquidity pools let us now start the process of adding liquidity for our passive income. First, we must go to the website of TribalDex, you can follow this link >> https://tribaldex.com/ then log in your hive account or you can use hive keychain and go to POOLS
There are currently a wide variety of liquidity pools that you can use for your passive income. If you click again on POOLS you will see the available token pairs that you can use for your liquidity pool and you can also see the pairs that has a LP reward or Liquidity provider reward.
Next, we need to go to ADD LIQUIDITY and select the token pair that we want to use. For me since I'm playing Splinterlands I'm using the HIVE:DEC and DEC:SPS pools. Another rule to remember here is the token pair must be equal to each other for us to add to the liquidity pool. Quick example is the picture below.
The two token pairs are equal 95 SPS is equivalent to 3809.324 DEC tokens. After we put in the numbers we can now add to the liquidity pool! And sit back and relax and dont forget to claim your rewards every day!
The risks of liquidity pools
If you provide liquidity to an AMM, you’ll need to be aware of a concept called impermanent loss. In short, it’s a loss in dollar value compared to HODLing when you’re providing liquidity to an AMM.
If you’re providing liquidity to an AMM, you’re probably exposed to impermanent loss. Sometimes it can be tiny; sometimes it can be huge.
Thank you for reading and I hope you have a nice day! If you have questions feel free to comment on my post and I will answer your questions to the best of my ability and knowledge.