Introduction
Today I will teach you how to earn money providing liquidity on SushiSwap. Earning as a liquidity provider is in my opinion the most disruptive function of decentralized finance so far. Smart contracts are automating a strategy that was only available to VERY wealth individuals prior to DeFi.
This is the culmination of several articles I have written previously. Before you can make money in this manner you should familiarize yourself with:
We will be transacting on the polygon network because of its speed and cost. We will be providing liquidity on SushiSwap because of its reputation and rewards.
Let’s Begin.
Selecting a Liquidity Pair
The first task is to select the tokens of which we will be providing liquidity for. There are several things to think about when making this decision.
- Return.
- Impermanent Loss.
- Risk of getting rugged.
Return
The most important thing about selecting a pair for liquidity providing is the return. You are taking risk by providing liquidity. You need to be properly compensated for this risk. Open up sushi swap by going to www.sushi.com.
Once there click on Enter App to launch the Sushi Swap App.
You will need to connect to your wallet. I use MetaMask. If you need to create a MetaMask wallet, I wrote an article on how to do that too!
Now that your wallet is connected you need to switch the network you are on to the Polygon Network.
Congrats! You are now in SushiSwap on the Polygon Network. Different networks have different transaction costs and differences in rewards. Since we are planning on transacting on Polygon we need to be on Polygon to check what returns we can get for providing liquidity.
Were now going to click “Farm” in the top Left of the page to bring us to possible pairings…
The Farm Tabs
On the Farm page there are three selections on the left hand side:
- Your farms
- All farms
- 2x Rewarded Farms
“Your Farms” are farms in which you are providing liquidity for. If you have a bunch this is a really easy way to keep they organized so that you can “harvest” your farms regularly. More on that later.
“All Farms” will display all the farms that are currently available on SushiSwap on the smart contract network you have selected.
“2x reward farms” displays farms in which you will get multiple rewards. This applies more to SushiSwap on the Ethereum network than on Polygon, because all farms on Polygon give both Sushi and Polygon rewards.
Other SushiSwap Farm Information
There is other important SushiSwap Farm information on this page. Each farm has 4 pieces of information to pay attention to:
- Pool
- TVL
- Rewards
- APR
You can click on any of these columns to sort by each of them on the SushiSwap Farm page.
The pool is the two tokens of which you are providing liquidity for. The top pool (for APR) is WMATIC/COMBO.
TVL is short for total value locked. This is the dollar value of capital locked in the liquidity pool.
Rewards give what is distributed daily to the liquidity providers.
Finally APR is what the return would be if the current pool size, usage and reward distribution were to occur for a full year. Remember that apart from the rewards, Liquidity providers also earn 0.25% of the transactions for their pool proportional to their contribution.
Impermanent Loss
Before you get all gung ho and put ALL your money into being a liquidity provider, I better tell you about impermanent loss. Apart from transaction fees, impermanent loss is the #1 way to lose $$$ being a liquidity provider. Impermanent loss occurs when the price of one token changes more than the price of the other token.
The algorithm used by decentralized exchanges to regulate price and supply means that when there are big price movements opportunities arise to arbitrage price. So if price moves, arbitragers can buy the cheaper one on the DEX and sell at a profit. Your liquidity protocol tokens give you a percentage claim on the overall pool *NOT WHAT YOU SPECIFICALLY PUT INTO THE POOL* so if the pool composition changes you may have just been better off holding your coins.
Theoretically the rewards you earn should offset this BUT it doesn’t always happen this way.
When I am picking on a liquidity pair, if I’m going to hold for the long term, I never pick a crypto and a stable. I’m either stable-stable or crypto-crypto. On Sushi Swap, we’re going to pick crypto-crypto.
Risks of Getting Rugged
The biggest risk with being a liquidity provider is getting rugged. This is when you see a HOT HOT DEAL that seem too good to be true (it is). There’s a new protocol, probably with anonymous founders. There are mouth-watering returns usually in the token that is part of the liquidity pair. You buy and add liquidity. Greed takes over.
You wake up the next day to find that the price has collapsed. The anon founders stole your money. They set up some dummy liquidity between their token and ETH or a stablecoin then proceeded to hype up the rewards on discord or twitter. This brought in a bunch of greedy people trying to make a quick buck (you) only before you could they traded all their token sucking the liquidity dry.
This happens to everyone, hopefully just once. SushiSwap keeps this kind of stuff away but if your providing liquidity on other smaller exchanges, be careful.
How to Provide Liquidity
With all of that in mind I am going to show you how to provide liquidity for WMATIC/WETH pair on SushiSwap. A couple things before I start:
- The TVL is 94 BILLION with a B. With this TVL it would be almost impossible for this to be a rug (also MATIC/ETH are established).
- Daily rewards are 2229 sushi and 2246 MATIC distributed proportionally to all of the liquidity providers based on what percentage of the TVL they own.
- If you hover your cursor over the question mark near the APR value it will give you a breakdown. ~10% of the APR is from fees, 2.7% from rewards.
Click “Swap” in the top left hand corner of the screen. This will bring you to the Swap screen.
If you need to buy what you are providing liquidity for, now would be the time for that, but that function is outside of this article’s scope.
Click liquidity to bring you to the liquidity screen.
Select WMATIC and WETH for liquidity. It is vital that you select “WMATIC” not “MATIC” and “WETH” and not “ETH.”
Confirm adding the liquidity, you can add as much or as little as you like. 50 WETH seemed like a nice round number for me.
Confirm the supply.
Finally confirm in Metamask. If you check you MetaMask assets you should now see the SLP that corresponds to the liquidity that you added.
Now return to the “farm” page and select your farm.
A lot going on in the screenshot above. First I hit max for the amount to stake. Second I hit Stake. Third, when the metamask confirmation popped up I hit confirm.
Congratulations, you are now a providing liquidity on SushiSwap and taking advantage of the rewards for staking your LP tokens.
Conclusion
That’s it. You’re now on you way to becoming a degenerate DeFi gambler. As the rates get juicier, remember what I have written here about impermanent loss and rug pulls. Sushi Swap is good, but there are a lot of other shadier swaps up there whose teams don’t do as much due diligence as the Sushi Team.
Good luck and happy liquidity providing!
