How to Become a Liquidity Provider on Lends

As a liquidity provider (LP) on Lends, you'll be contributing your digital assets to pools that allow traders to swap currencies seamlessly. This guide will walk you through the various aspects of adding liquidity, understanding the associated risks and rewards, and the operational details of both symmetric and asymmetric deposits.

Understanding the Basics of Liquidity Pools

Liquidity pools on Lends function with native assets. For instance, if you're looking to participate in the RUNE-BTC pool, you would need to deposit native BTC. The key to these pools is maintaining a balance; every deposit must adhere to a 50/50 value split between RUNE and the chosen asset.

Initiating Your Deposit: Symmetric vs. Asymmetric

Symmetric Deposits: Here, you'll contribute equal monetary values of RUNE and another asset. Since the balance is inherent, the pool doesn't need to adjust your deposit.

  • Equal Values: You contribute equal monetary values of RUNE and another asset.

  • No Rebalancing Needed: The pool does not need to adjust your deposit as it is already balanced.

Example: If you deposit $10,000 worth of BTC, you also need to deposit $10,000 worth of RUNE.

Asymmetric Deposits: In this mode, you add a single type of asset, which the system then rebalances to a 50/50 mix of RUNE and the asset. Asymmetric deposits can be subject to slippage and fees due to the adjustment process, which also exposes you to potential losses especially in less filled pools.

  • Single Asset Contribution: You add only one type of asset.

  • Automatic Rebalancing: The system rebalances it to a 50/50 mix of RUNE and the asset.

  • Potential Fees and Slippage: Subject to adjustment processes that may incur costs.

Warning: Asymmetric deposits in shallow pools might lead to significant losses due to arbitrage activities.

Shifting from Impermanent Loss Protection

Important: THORChain once offered Impermanent Loss Protection (ILP), which has now been phased out due to the introduction of Savers Vaults. As of block 9450000, around February 6th at 7:50 PM EST, ILP was discontinued for new Dual LP deposits and completely ceased on December 6, 2023.

The Financial Dynamics of Adding Liquidity

Fees and Risks: Participating as an LP involves certain fees:

  1. The transaction fee for depositing on-chain.

  2. A liquidity fee based on the slippage during rebalancing.

  3. The redemption transaction fee when withdrawing assets.

Depositing into a poorly filled pool risks significant asset loss if arbitrageurs exploit the resulting imbalance.

Withdrawals: You can withdraw your assets anytime, with fees paid in either native RUNE or the deposited asset, depending on your deposit type.

  • No Lock-up Period: Assets can be withdrawn at any time.

  • Fee Payment: Paid in native RUNE or the asset's native currency, depending on the withdrawal type.

Considerations for Choosing Deposit Types

The choice between asymmetric and symmetric deposits should be guided by your investment strategy and needs for flexibility. Symmetric deposits offer more withdrawal options, potentially reducing complexities and fees.

Tax Implications and Final Steps

Tax impacts vary by country and are influenced by whether the liquidity adding event is considered a transaction. It's crucial to understand these implications as they apply to withdrawals and asset valuation changes.

Adding Liquidity:

  • Symetrically

  • RUNE Asymmetrically

  • NATIVE ASSET Asymmetrically

Tip: Always consider the pool depth and potential slippage before making large asymmetric deposits.

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