Providing Liquidity
Last updated
Last updated
Welcome to the Liquidity Provider (LP) Guide for FireFly.
As an essential part of our ecosystem, your contribution as a liquidity provider facilitates token swaps by adding to our liquidity pools.
This tutorial guides you through the steps to become a Liquidity Provider, understand the rewards system, and effectively manage your liquidity positions.
FireFly offers two ways to provide liquidity: by depositing a pair of tokens or by adding single-sided liquidity.
You may notice that when you add liquidity on firefly, you'll be asked a few things- what fee tier you want (ie: 0.05%, 0.03%, etc.), what price range of your tokens is acceptable, and how much of each token to provide. firefly has Concentrated Liquidity which means you choose the range of prices you want to LP for.
Selecting a Pool: Choose a suitable token pair you would like to provide liquidity for. Consider the pool size, trading volumes, and token stability.
Providing Liquidity
Visit the 'Pool' tab on the FireFly DEX interface.
Deposit Tokens: Select your token pair and specify the amounts you want to deposit.
Approve and Confirm: Approve the transaction in your wallet and confirm the deposit.
Setting Your Price Range for Liquidity
Choose the Fee Tier: the interface will tell you which option (0.05%, 0.3%, 1%) is the most common for that trading pair. That is usually a safe option. Generally 0.05% is for stable pairs (ie: USDC-USDT), 0.3% fee tier is for most pairs, such as variable pairs (ETH-USDC). 1% fee tier is rare but is sometimes used for highly variable tokens such as meme coins.
Choose Your Price Range: Decide on the specific range within which you want to provide liquidity. You can opt for a particular range or cover the entire price spectrum.
Enter Token Amount: Specify the amount of tokens for deposit or select “Max” for the maximum available amount.
Approve Token Use: Approve your tokens for liquidity provision in your wallet. This action involves a network transaction cost.
Preview and Add Liquidity: Review your liquidity position details, then select “Add”.
Confirm Transaction: Finalize the process by confirming the transaction in your wallet.
Once your transaction is completed, you can monitor and adjust your liquidity position directly from the V3 Pool page.
By narrowing the defined price range of your position, you'll earn a higher APR since there's a higher density of your tokens where the tokens are trading. BUT, if the token prices move outside of your set range, you will not be earning LP fees until you shift the price range of your LP accordingly.
The amount of each token that you provide for your position will not necessarily be 50%-50%. It depends on the price range you set for the position.
To help you understand how it all works, we've provided a few helpful links to YouTube videos that will simplify this if you find it confusing. Our Pools system at firefly is identical to Uniswap's. The videos below will refer to Uniswap but the same approach will work on firefly.
The videos will explain things like: how to pick a fee tier, how to choose how many tokens to supply, and how to select price ranges.
YouTube Videos on Concentrated Liquidity
Basic Guide of Concentrated Liquidity LP
More Advanced Guide of Concentrated Liquidity LP
Detailed breakdown of how Setting Price Ranges in LP's work
Single-sided liquidity is an exclusive feature of the FireFly DEX, setting us apart from competitors. It offers unparalleled flexibility, allowing you to provide liquidity with just one token from a token pair.
This unique approach is ideal for those who hold only one type of token but still want to participate in liquidity provision.
How to Provide Single-Sided Liquidity:
Navigate to Pools: Go to the 'Pool' tab on the FireFly DEX interface.
Add Liquidity: Select 'Add Liquidity' to start the process.
Set Your Price Range: Define a price range for your token that is outside the current market price. This will determine when your liquidity becomes active in the pool.
Preview and Add: Review your liquidity details in the 'Preview' step, then proceed by selecting 'Add' to add your liquidity to the pool.
Confirm the Transaction: Confirm the transaction in your wallet to finalize your liquidity provision.
Swap Fees
As an LP, you earn a portion of the swap fees from the trading activity in your pool.
Fee Distribution: 100% of swap fees are distributed to liquidity providers.
Fee Tiers: Fees vary based on the token pair's volatility and liquidity needs, ranging from 0.05% to 1%.
Reward Mechanism
As a Liquidity Provider, your rewards are seamlessly integrated with your investment in the liquidity pool, automatically compounding for an enhanced experience. For example, if you invest $10,000 in the USDC/USDT pool with a 20% APR, you would withdraw $12,000 after a year. This amount includes your original $10,000 plus the $2,000 earned as rewards, maximizing your earnings without separate claims or processes.
Be aware of "impermanent loss," which occurs when the price ratio of your tokens shifts post-liquidity provision.
You have the flexibility to add more liquidity or withdraw some of your liquidity anytime.
To do this, go to your current position in the "Pool" section and choose "Increase Liquidity" or "Remove Liquidity."
