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An overview of providing liquidity
Liquidity Providers (LPs) creating and adding to liquidity pools enables Sifchain to provide swapping functionality. LPs provide assets that can then be swapped for other assets by other users. For example, a LP can come along and say they want to contribute to a Liquidity Pool of Token A <> ROWAN. So they would provide an amount/s of Token A and/or ROWAN to the pool for other people to swap for.
The LPs are then compensated with swap fees and system rewards. Compensation is affected by a number of factors related to the pool and the state of the network.
Liquidity providers are able to deposit any token Sifchain supports to the appropriate pool. Liquidity providers are able to add or remove liquidity whenever they choose. Please refer to our documentation on Sifchain Liquidity Pools for additional details around these concepts.
Liquidity pools are important in decentralized finance (DeFi) — particularly decentralized exchanges (DEX). Because Sifchain is the world’s first omni-chain DEX, this technology is fundamental to our vision.
Sifchain enables liquidity providers to add liquidity into pools where they can earn income without constraints endemic to other exchanges. Liquidity providers can deposit any token Sifchain supports to the appropriate pool.
Sifchain rewards users who provide liquidity with various forms of income, from trading fees paid by users swapping in the pool, to interest earned margin traders borrowing liquidity from the pool, to extra rewards and incentives. Guidance on current rates will be displayed on the 'Pool' tab of the DEX.
Liquidity Providers of pools that have margin trading enabled will earn interest from traders who take out margin trading positions. At a high level, the system works as such:
- Liquidity providers provide liquidity to a liquidity pool.
- Margin traders borrow some of that liquidity, as determined by the position they are taking, the amount of collateral they are providing, and their desired leverage.
- Margin traders pay interest back to the liquidity providers for allowing them to borrow funds.
- Margin traders will continue to pay interest until their position is manually closed, or they are liquidated.
Sifchain has run a variety of incentivized Liquidity Mining Programs to encourage users to add liquidity to SifDEX. To learn more about the latest program and what you can expect to earn as part of this program, reference our Liquidity Mining Rewards Programs page.